TESTING FOR FRACTIONAL INTEGRATION IN SOUTHERN AFRICAN DEVELOPMENT COMMUNITY REAL EXCHANGE RATES

This paper utilises “a class test for fractional integration” associated with the seminal contribution of Hinich and Chong to appraise the possibility that Southern African Development Community (SADC) real exchange rates can be treated as long memory processes. The justification for considering fractional integration is that the general failure to reject the unit‐root hypothesis in real exchange rates is caused by the restrictiveness of standard unit‐root tests regarding admissible low‐frequency dynamic behaviour. The paper presents evidence that, except for South Africa, none of the SADC real exchange rates are fractionally integrated. However, the results are found to be sensitive to the size of the sample.     

Mean Reversion of Real Exchange Rates in High-Inflation Countries

We test for mean reversion in real exchange rates using data from five countries, four of which have experienced episodes of high inflation. Using monthly data for Argentina, Brazil, Chile, Colombia, and Israel, we find that a stochastic unit root model is typically appropriate (Brazil is the exception). Kalman filter estimates of the stochastic unit roots show sharp deviations from unity associated with high inflation episodes. This suggests that stochastic unit root models are a more appropriate way to model mean reversion in real exchange rates for high inflation countries than models with fixed rates of mean reversion.     

基于STAR模型的中日汇率态势检验

改革开放是我国发展壮大的必经之路.其过程离不开与其他国家或地区的经济交往,因此必然受到国外经济的影响.随着我国经济开放程度的不断扩大,汇率的变动对我国经济变动的影响也越来越大.在我国对外贸易中,日本是一个不容忽视的贸易对象国,本文采用基于STAR模型的KSS非线性单位根检验分析法和传统的ADF与PP检验对中日实际汇率进行了实证检验,检验结果表明,我国汇率符合购买力平价理论,这说明现有的参考一篮子货币的有管理的浮动汇率制度正逐步达到市场有效性和预期效果,应继续发挥市场供求在人民币汇率形成中的基础性作用,增强浮动弹性.     

Mean Reversion in the Real Interest Rate and the Effects of Calculating Expected Inflation

We investigate the measured persistence in the real interest rate using a variety of methods to annualize inflation and calculate the real rate. Results from a battery of conventional unit root tests yield conflicting conclusions for the various real rates, adding to an existing confusion regarding mean reversion. Both long memory and exponential smooth‐transition autoregressive models (ESTAR) nonlinearity are considered as possible alternatives, and in contrast to the unit root test results, we find highly robust evidence against the unit root null. Based on the empirical results, Monte Carlo analysis is performed to study the disparate results obtained using fractional integration and unit root tests.     

Pitfalls in panel tests of purchasing power parity

Pitfalls in Panel Tests of Purchasing Power Parity. —The results of panel unit root tests applied to real exchange rates as a test of long-run purchasing power parity (PPP) diverge much. In particular, due to misspecifications there is little evidence of the convergence of real exchange rates for the German mark. This paper provides evidence of this issue by analyzing large panels of real exchange rates vis-à-vis the German mark and the dollar. In particular, the impact of the base country and various aspects of the dynamic specifications are analyzed. Overall, the results provide strong evidence in favour of PPP as a long-run relationship.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: EVIDENCE FROM PANEL SURADF TEST

This study reexamines the validity of long-run purchasing power parity (PPP) hypothesis using a battery of panel unit root tests for 11 developing countries in Africa over the period 1980-2007. Based on the conventional panel unit root tests, we found evidence that the monthly real exchange rates in these countries were mean reverting. By contrast, the series-specific unit root test proposed by Breuer et al. (SURADF) reveals that only six of the 11 RERs series were stationary using the US dollar as reference currency. Additionally, our results reveal that there is stronger evidence of the parity condition with the Rand-based rates than in the other currency-based rates like the US dollar or Euro. We conclude that PPP holds in some, but not all, of the African countries according to the SURADF tests.     

Fundamental equilibrium exchange rates and exchange rate dynamics

This paper examines whether there is a tendency for actual exchange rates to return to their fundamental equilibrium exchange rates (FEERs) when the latter are estimated based on popular exchange rate models. Co-integration tests and unit root tests are applied. There is little evidence that the exchange rates of Japan and Germany have a reversion to the purchasing-power-parity (PPP) rates or Williamson's FEERs or the underlying external and internal balance (UEI) FEERs.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: FURTHER EVIDENCE FROM FOURIER UNIT ROOT TESTS BASED ON LINEAR AND NONLINEAR MODELS

This paper examines the validity of purchasing power parity hypothesis for 33 African countries using recently developed Fourier unit root tests by Christopoulos and León‐Ledesma that account for the existence of multiple breaks in the real exchange rates. The results support the evidence of the PPP in 20 countries, showing that most of the real exchange rates in the selected countries are characterised by linear or nonlinear stationary around multiple temporary mean changes.     

Purchasing Power Parity in Developing Countries: Multi-Period Evidence Under the Current Float

Using panel unit root tests, we examine purchasing power parity (PPP) for US dollar real exchange rates of developing countries during the current floating rate period. Since evidence of PPP may vary from period to period, we examine the data for moving 10-year periods from 1976–85 up to 1990–99. We organize panels based on country characteristics influencing the validity of PPP. Those characteristics include openness, inflation, and the level and growth rate of per capita GDP. Although we find stronger evidence of PPP after 1980, our examination of panel data over 15 10-year periods yields only limited support for PPP.     

Testing PPP for the South African Rand/US Dollar Real Exchange Rate at Different Data Frequencies

This paper tests the PPP hypothesis for the South African rand/US dollar real exchange rate using a fractional integration framework. The results suggest that the real exchange rate of the South African rand with respect to the US dollar is a highly dependent variable with an order of integration very close to 1. This finding is not affected by the data frequency considered (daily, weekly or monthly). Also, there appears to be a single break in December 2001 (possibly corresponding to a change in the monetary policy framework), with the unit root null being rejected in favour of d > 1 for the periods before the break, but not afterwards. Thus, our results strongly reject the PPP hypothesis for the South African rand/US dollar rate across data frequencies, since shocks are found to affect the exchange rate forever.     

Structural breaks and the equilibrium real effective exchange rate of China: A NATREX approach

This paper investigates the equilibrium real effective exchange rate for the Chinese RMB during the post-reform period, 1982–2010. We extend the NATREX model in several important perspectives and apply it for the first time to China. A wide range of economic fundamentals that are unique to the Chinese economy is introduced into the model. We construct a unique set of quarterly data and employ unit root and cointegration tests that can account for multiple endogenous structural breaks. In addition, to capture the evolution of China's foreign trade pattern, we employ time-varying (i.e. 3-year average) trade weights to construct the real effective exchange rate. We find two structural breaks in the cointegration relationship (in 1988 and 1992). Effective terms of trade, demographic factors, liquidity constraints and government investment are significant determinants of the equilibrium real effective exchange rate. The RMB was overvalued against a basket of 14 currencies until mid-1980s. During 1986–2010, it was undervalued in most years except after the Asian financial crisis in 1997. We have found persistent undervaluation from 2004 onwards. However, the misalignment rates are much lower than those reported by previous studies and the undervaluation rate actually declined sharply in 2008. The undervaluation rate rose modestly in 2009 and sharply in 2010, though it is still lower than what has been suggested by other studies.     

Exchange rate systems and linkages in the pacific basin

This paper analyzes the exchange rate systems of 10 Pacific Basin economies and linkages of their currencies with the major currencies. The recent advances in time series analysis, including unit root tests and cointegration tests, are utilized for this purpose. The results suggest that while many Pacific Basin developing economies are inclined to have a peg or crawling peg system and peg their currencies primarily to the U.S. dollar, the influence of the Japanese yen in this region is also strong, especially on the exchange rates of the Asian newly industrializing economies. For Australia and New Zealand, their exchange rates move in tandem.     

The Long-Run Purchasing Power Parity for the Yen: Historical Overview

This paper examines the long-run behavior of the yen/dollar real exchange rate. Several series are spliced to compose long Japanese consumer and wholesale price indices, long U.S. consumer and wholesale price indices, and the yen/dollar exchange rate, from 1879 to 1995. The CPI-based real exchange rate tended to depreciate in the pre-WWII periods, but strongly appreciated in the post-WWII periods. The WPI-based real exchange rate did not show any trend in the pre-WWII periods, but appreciated moderately in the post-WWII periods. The unit root tests were not rejected for the CPI-based real exchange rate series, but some of them were rejected for the WPI-based real exchange rate series, suggesting mean reversion property only for the WPI-based series. The Balassa–Samuelson hypothesis to explain a drift and/or a trend in the real exchange rate series had only a weak support.J. Japan. Int. Econ.,December 1997,11(4), pp. 502–521. Institute of Economic Research, Hitotsubashi University, Naka 2-1, Kunitachi, Tokyo 186, Japan.     

Decline in the persistence of real exchange rates,but not sufficient for purchasing power parity

The paper investigates the possibility of decline in the persistence of real exchange rates, or deviations from PPP. To this end, we test the null hypothesis of no decline in the PPP deviation persistence between two subsamples using a fractional integration framework. The test rejects the null at the 10% significance level for nine out of 17 countries, providing solid evidence for a decline in the persistence of real exchange rates. However, the decline is not sufficient for PPP, meaning we fail to reject the unit root hypothesis even in the latter period for all 17 countries. In addition, our rolling-window estimates show that the real exchange rate of many countries have experienced a sharp drop in their persistence once we use samples starting from the mid-1980s. Finally, we examine the relationship between the dynamics of PPP deviation persistence and several economic variables and confirm that the speed of convergence of PPP deviations is highly related to economic/financial integration and world economic stabilization.     

Real Exchange Rate Stationarity in Latin America and Relative Purchasing Power Parity: A Regime Switching Approach

This paper tests for long-run purchasing power (PPP) among a sample of six Latin American economies. The key contribution of this paper is in terms of the econometric methodology where non-stationarity of the real exchange rate is tested within a Markov regime-switching framework. In contrast to existing studies, this paper defines two new concepts of PPP where one allows for the possibility that real exchange behaviour either switches between stationary and non-stationary regimes (partial PPP), or switches between stationary regimes characterised by differing degrees of persistence (varied PPP). Whereas standard univariate unit root testing suggests that Latin American real exchange rates are generally non-stationary, employment of the regime-switching methodology indicates that most of the sample is characterised by the existence of two distinct stationary regimes. Further analysis indicates that the high rates of inflation and exchange rate volatility experienced in Latin American have given some impetus towards facilitating long-run PPP.

Purchasing Power Parity under the Gold Standard

Long-run purchasing power parity (LRPPP), the basis of most open economy macroeconomic models, has proved difficult to back up empirically. However, there is one standout exception to the otherwise mixed results. Diebold, Hasted, and Rush (1991) are consistently cited as having found strong evidence of LRPPP by using a fractionally integrated moving-average model whose restrictions are looser than those of traditional unit root tests. We propose structural change rather than fractional integration as a plausible behavior pattern for the data. Using the Bai-Perron (1998) test for multiple structural change, we find mean shifts in each of the real exchange rates. When those shifts are included in the model, the speed of mean reversion is greatly improved. We assert that quick mean reversion around an occasionally changing mean provides a more reasonable representation of the data than does fractional integration.     

Are Real GDP Levels Nonstationary? Evidence from Panel Data Tests

Ever since the seminal paper of Nelson and Plosser (1982), researchers have focused on the potential nonstationarity of important macroeconomic variables, and unit root tests are now a standard procedure in empirical analyses. While there are many findings of unit roots in macroeconomic variables using the popular augmented Dickey and Fuller (1979) test, this test has low power against near-unit-root alternatives. Recently, panel data procedures have been proposed as an avenue to increased power. This paper applies panel unit root tests to international real GDP and real GDP per capita data. The results overwhelmingly indicate that international real GDP and real GDP per capita levels are nonstationary.     

Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries?

In an effort to fight relatively high inflation, many developing countries try to manage their nominal exchange rates through official intervention. In addition, developing countries tend to have high transportation costs, tariffs, and nontariff barriers. These factors are among the sources of generating nonlinearity in real exchange rates and hence some nonlinear adjustment toward purchasing power parity (PPP) in developing countries. In this paper, we employ monthly real effective exchange rate (REER) data of 88 developing countries and test the null of nonstationarity versus an alternative of linear stationarity by the means of a conventional unit root test and compare the results with those obtained from a new test in which the null is the same but the alternative hypothesis is nonlinear stationarity. The latter test supports the PPP theory in more developing countries compared with the former test, suggesting that nonlinear adjustment toward PPP in developing countries is an important phenomenon. Reported country characterizations indicate that reversion in REER occurs more often for high-inflation countries and for countries with high flexibility in their exchange rates.     

Changes in misalignment of the Korean won: Towards a flexible exchange rate regime

This paper investigates whether the adoption of a more floating exchange rate regime with inflation targeting has improved the vulnerability of the exchange rate, by looking at the Korean case. Using the NATREX model, I estimate the equilibrium real exchange rate of the Won and its misalignment. The unit‐root test for misalignment and the unrestrictive vector autoregressive (VAR) impulse response function test show that under a more flexible exchange rate regime, the vulnerability of the exchange rate regime to external shocks has declined.     

Nonstationarity of Real Exchange Rates in the G7 Countries: Are They Cointegrated with Real Variables?

Using monthly data for the G7 countries in the post-Bretton Woods floating rate period, this paper demonstrates that almost all bilateral real exchange rates have unit roots and, hence, are nonstationary. Consequently, it rejects simple PPP as a long-run relationship. The paper also shows that many of these real exchange rates are cointegrated with other real economic variables such as relative labor productivity, terms-of-trade ratios, real trade balance ratios, and long-term real interest rate differentials. In particular, relative labor productivity is statistically significant with the correct sign for more than half of the country pairs for which cointegration is confirmed. This finding lends support to the Balassa–Samuelson productivity-bias hypothesis. These results imply that nonstationarity of real exchange rates and the consequent rejection of simple PPP can be consistent with the notion that real exchange rates revert to an equilibrium in the long run without deviating arbitrarily far from this equilibrium position.J. Japan. Int. Econ.,December 1997, pp. 523–547. Institute of Social Science, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan, and Faculty of Business and Commerce, Meiji University, 1-1 Kanda, Surugadai, Chiyada-ku, Tokyo 101, Japan.