Dominant real exchange rate movements

Principal component analysis is used to investigate two types of questions about the behavior of real exchange rates. First, what group of currencies display the same empirical regularities? Can we attribute dominant movements in real exchange rates to a specific country (e.g., the United States) or a group of countries? Second, does the prevailing nominal exchange rate regime affect the long-run properties of real exchange rates? In the empirical analysis we use real exchange rates between 15 industrial countries for the sample period 1957 to 1986. The standard principal component analysis is modified such that results are independent of the numeraire currency. © 1989.