This paper empirically examines the long-run relationship between real exchange rates and real interest rate differentials over the recent floating exchange rate period, using a panel cointegration method, with data for a set of industrialized countries. The paper finds evidence of statistically significant long-run relationships and plausible point estimates, which contrasts with much existing evidence. The failure of others to establish such relationships may reflect the estimation method they use rather than any inherent deficiency of the fundamentals-based models.

The paper estimates Angola’s equilibrium parallel market real exchange rate during the 1992–98 period. Using standard integration/co-integration techniques, the results fail to support the purchasing power parity hypothesis and indicate that two exogenous variables—the price of oil and the foreign interest rate—are able to explain most of the variation in the real exchange rate during the last seven years. These results contrast with the tenet that the parallel market exchange rate in Angola is solely influenced by monetary developments.