Real effective exchange rates and purchasing-power-parity convergence: Empirical evidence for Denmark, 1875–2002

Official nominal and real effective krone-rate indices compiled by the Danmarks Nationalbank are available only for the most recent decades. This article makes an attempt to overcome this data shortage by constructing long historical time-series indices of nominal and real effective krone rates for the period 1875–2002. Furthermore, the article presents a first exploratory examination of the empirical evidence regarding long-run relative purchasing-power-parity (PPP) convergence based on univariate unit-root testing of the two new long time-series indices for the real effective krone rate, with respectively consumer prices and wholesale prices as deflators. The fastest mean reversion towards relative PPP seems to have occurred in those periods where Denmark has pursued a fixed-exchange-rate policy vis-à-vis the majority of its trading partners and thus in those periods with the lowest volatility in the nominal effective krone rate.