The long-run relationship between the real exchange rate and terms of trade in OECD countries

Using the null hypothesis of cointegration, it is shown that the real exchange rate and the terms of trade of the seven major OECD countries are cointegrated in the long run. Our results also confirm the Granger proposition that there is Granger causality in at least one direction when two variables are I(1) and cointegrated. We find that exchange rate changes Granger-cause changes in the terms of trade for five out of the seven OECD countries, while the causation runs in the opposite direction for the remaining two countries.