New tests for stationarity and parity reversion: Evidence on New Zealand real exchange rates

The present paper discusses the stochastic stationarity of New Zealand exchange rates in light of new time series methods and new tests. The question of whether the real exchange rates have a unit root or are mean reverting is set in the general framework of fractionally integrated models. The estimates sustain the claim that New Zealand real exchange series are not stationary. However, it is shown that nonstationarity is compatible with parity reversion in the framework of fractional unit-root models.     

Measuring international competitiveness: experience from East Asia

This paper uses a new measure of real exchange rates as an indicator of international competitiveness. This new measure involves defining all prices and exchange rates on an appropriately weighted basket of currencies rather than a single currency. The measure is applied to the data for Japan, Korea, Thailand, Malaysia and Singapore. For comparison purposes, we calculate real exchange rates based on purchasing power parity (PPP) for these countries. To check for the relative performance of the two measures, cointegration tests are employed. The results indicate that the new measure tends to be closely related with the export growth for the sample countries, while the PPP-based measure is not. Moreover, the PPP-based real exchange rates tend to understate the measures of competitiveness for these countries. This result has important implications in terms of the levels of these countries' exchange rates as well as the well-known Balassa hypothesis.     

A Test of Long-run Purchasing Power Parity Allowing for Structural Breaks*

If exchange rates and prices are integrated processes, standard econometric tests of the purchasing power parity (PPP) hypothesis may be biased towards rejection. This paper avoids this problem by using the Engle and Granger (1987) theory of cointegrated processes. If the absolute version of purchasing power parity is true, and nominal exchange rates and prices are integrated processes, inter-commodity arbitrage should ensure that the real exchange rate is stationary. The stationarity hypothesis is tested using Australian real exchange rate data for the 1890–1984 period We find that the effective real exchange rate cannot be modelled as a stationary process and therefore reject the absolute version of PPP. We also employ a test for structural breaks due to, for instance, the oil price shock and find mixed results. Another interpretation of our results is that the real exchange rate was affected by a series of permanent, real shocks during the sample period     

Asymmetry dynamics in real exchange rates: New results on East Asian currencies

This paper provides new evidence on the purchasing power parity (PPP) hypothesis in six East Asian countries. Based on nonlinear unit root tests, we discovered that the results are broadly consistent with the fact that real exchange rates (RERs) follow a nonlinear mean reversion process. We presented new evidence that the adjustment towards the PPP parity is asymmetric (LSTAR process) above and below the equilibrium value in all but one case — the Malaysian ringgit (MYR). The empirical results suggest that it is important that the conventional tests of PPP be amended to take account of asymmetries in the adjustment process in RERs.     

THE REAL INTEREST RATE DIFFERENTIAL: INTERNATIONAL EVIDENCE BASED ON NON-LINEAR UNIT ROOT TESTS

This paper aims at testing international parity conditions by using non-linear unit root tests advocated by Kapetanios et al . (2003, KSS). Results from the KSS tests based on 17 countries (G7 and 10 Asian countries) overwhelmingly show that the adjustment of real interest rates towards real interest rate parity (RIP) follows a non-linear process except for the Taiwan, Hong Kong and Philippines relationships with both the USA and Japan. Overall, the empirical results are in favour of RIP using the USA and Japan as the centre countries but only if non-linearities are accounted for in the data-generating process. Our findings confirm that interest rate differentials, like the real exchange rates reported in recent literature, display a non-linear mean reversion process.     

Reconsidering Real Interest Parity for Traded and Nontraded Goods

The goal of this paper is to examine the hypothesis of real interest rate parity by contrasting real interest rates across traded and nontraded goods under flexible exchange rates. We employ panel unit root tests to investigate the stationarity of real interest rate differentials. In particular, empirical results support the mean‐reverting property of real interest rate differentials for interest rates measured in terms of traded goods.     

The real exchange rate and the black market exchange rate in developing countries

This article tests for the validity of the Purchasing power parity (PPP) theory using both the black market and the official exchange rates for panels with cross sectional dependency. The test is conducted using a newly developed, nonlinear IV panel unit root test that properly handles cross-sectional dependency for thirty-seven developing countries. We find that the null of joint unit root hypothesis is rejected for the whole panel, using the black market exchange rate, and for sub-panels of African and high inflation countries, using either exchange rate. The black market-based real exchange rates are, therefore, shown to provide stronger evidence for the purchasing power parity theory than do the official rates. This finding is consistent with the observation that black market exchange rates better represent market forces and thus are more relevant when testing for the validity of the PPP theory in developing countries.     

City CPI Convergence in Mexico

This paper tests the purchasing power parity hypothesis within a single developing country currency area: Mexico. This work stems from research in comparing price movements across countries and a growing literature on price dynamics within a single currency area. The author uses city Consumer Price Index data for 34 cities in Mexico over the period 1982–2000. He followed the standard procedure of testing for I(1) processes in relative city prices, or city real exchange rates, using univariate and panel unit root tests. The main results of the paper are: First, Mexican city relative prices are stationary—the data rejects the hypothesis that city real exchange rates contain a random walk, but only using panel unit root techniques. Finally, regional demand and supply homogeneity implies stronger evidence for price parity within regions, while there is considerable evidence of regional price convergence, regional homogeneity does not guarantee faster convergence.     

Tests of real interest parity in international currency markets

The purpose of this paper is to examine the behavior of real bilateral exchange rates for major currencies and test the hypothesis of real uncovered interest parity with risk premia, and forward looking expectations. It is plausible that the hypothesis of rational expectations cannot be rejected given the unit root nonstationarity of real exchange rates but it is not unlikely that unit root nonstationarity may be due to rational expectations in foreign exchange markets.     

Testing a theoretical model of mortgage demand on UK data

This study explores whether the long-run purchasing power parity (PPP) hypothesis holds for selected real exchange rates from Turkish economy during the period 1982M1–2003M12. In addition to conventional unit root tests, five different unit root test procedures have been applied including efficient point-optimal tests, extended M tests and GLS-detrended variants of DF tests, to four monthly real exchange rate series defined in terms of both producer and consumer price indices. The countries analysed are the USA, the UK, Germany and Italy which are major trade partners of Turkey. Mixed evidence is found for the long-run PPP hypothesis when real exchange rate is defined in terms of German DM and Italian Lira. However, the empirical analysis reveals that the PPP hypothesis holds strongly in the long-run for the UK£ and US$ based real exchange rates series using either PPI or CPI. In corroboration with other studies in the literature, the bias correlated half-life estimates suggest relatively faster speeds of adjustment supporting the view that the deviations from the PPP rate dissipate rather quickly for relatively high inflation countries.     

Non-linear quantile unit root test and PPP: more evidence from Africa

It is now a common practice to establish stationarity of the real exchange rate as a sign of purchasing power parity (PPP) hypothesis. In this article, we consider the real effective exchange rates of 29 African countries. When we apply conventional linear unit root tests, we find support for the PPP in eight countries. However, when we shift to the newly introduced non-linear quantile unit root test, support for the PPP increases to 15 countries.     

A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications

Panel unit root tests of real exchange rates—as opposed to univariate tests—usually reject non-stationarity. These tests, however, could be biased if the real exchange rate contained MA roots. Indeed, two independent arguments claim that the real exchange rate, being a sum of a stationary and a non-stationary component, is possibly an ARIMA (1, 1, 1) process. Monte Carlo simulations show how systematic changes in the parameters of the components, of the test equation and of the correlation matrix affect the size of first and second-generation panel unit root tests. Two components of the real exchange rate—the real exchange rate of a single good and a weighted sum of relative prices—are constructed from the data for a panel of countries. Computation of the relevant parameters reveals that panel unit root tests of the real exchange rate are severely oversized, usually much more so than simple augmented Dickey-Fuller tests. Thus, the evidence for purchasing power parity from first and second-generation panel unit root tests may be merely due to extreme size biases.     

Non-parametric tests of real exchange rates in the post-Bretton Woods era

This paper examines the mean-reverting property of real exchange rates. Earlier studies have generally not been able to reject the null hypothesis of a unit-root in real exchange rates, especially for the post-Bretton Woods floating period. The results imply that long-run purchasing power parity does not hold. More recent studies, especially those using panel unit-root tests or nonlinear time series models, have found more favorable results, however. But the results from these recent studies are far from conclusive. Consistent individual country time series evidence that supports long-run purchasing power parity continues to be scarce. In this paper, we test for long memory using (Lo’s in Econometrica 59:1279–1313, 1991) the modified rescaled range test, and the rescaled variance test of Giraitis et al. (J Econ 112:265–294, 2003a). Our testing procedure provides a non-parametric alternative to the parametric tests commonly used in this literature. Our data set consists of monthly observations from April 1973 to April 2001 of the G-6 countries (excluding the US) in the OECD. Using the modified rescaled range test, we find only 2 cases out of 15 where the null hypothesis of a unit-root with short-term dependence could be rejected in favor of the alternative hypothesis of long-term dependence and none using the rescaled variance test. Our results therefore do not provide strong empirical support for the stationarity of real exchange rates.     

购买力平价偏离理论综述

购买力平价说是一种基本的汇率决定理论,但影响购买力平价关系成立的短期或长期经济因素众多,从而使得实际汇率经常偏离平价关系.本文对有关文献中各种购买力平价偏离模型进行了综合分析,阐明了生产率、政府支出、货币供给、偏好需求和定价策略等基本因素作用于实际汇率的经济机制.     

Are real exchanges rate series really persistent?: evidence from three commonwealth of independent states countries

This article sets out to examine the degree of persistence in the real exchange rates of Kazakhstan, Kyrgyzstan and Russia, and tests the validity of Purchasing power parity (PPP) using monthly data covering 1995:01–2013:12 period. The sum of autoregressive (AR) coefficients is used in order to examine persistence of the real exchange rate series and grid-bootstrap method is employed for the confidence intervals. The tests performed suggest two results: (1) Covering the full sample and sub-sample periods, excluding Kyrgyzstan in 1995:01–1998:07 and Russia in 2008:09–2013:12 periods, disregarding the structural breaks in the data generating process, there is high persistency in real exchange rates; (2) there is evidence in support of PPP covering the full sample for every country except for Kyrgyzstan in 1995:01–1998:07 and Russia in 2008:09–2013:12 periods.     

Purchasing power parity and real factors

It is acknowledged that purchasing power parity (PPP) fails in empirical tests. The position adopted is that real factors are an omitted variable from the PPP relationship and are the cause of divergences from PPP. The real exchange rate as being determined by supply and demand shift factors (as in Stockman, 1987 and Neary, 1988) is modelled. We then empirically estimate a real exchange rate equation and use the fitted value as a generated regressor in tests of PPP. It is demonstrated that when changes in the real exchange rate are incorporated into the PPP relationship, PPP improves.     

Testing the validity of PPP theory for African countries

This study examines the purchasing power parity theory for 14 African countries by applying a recent composite time series method that incorporates the Fourier approximation. The structural breaks are modelled as a gradual smooth process by means of a Fourier component. The Fourier unit root test failed to find any evidence showing that real exchange rates for these 14 countries have mean-reverting tendencies. However, both cointegration and Fourier cointegration tests detect a stable long-term relation between the nominal exchange rate and relative price levels for 8 out of 14 countries; moreover, for five countries Fourier component in cointegration analysis is found to suit quite well.     

The real exchange rate in Brazil Mean reversion or random walk in the long run?

This paper studies the behavior of the real exchange rate in Brazil over the longest possible period for which data are available: 1855–1990. Does the real exchange rate follow a random walk or does it revert to its mean, possibly nonstationary, level? The evidence is mixed. Formal tests can not reject the hypothesis of nonstationary behavior, although the judgement is borderline. However, time-series identification favors a stationary interpretation, and simple autoregressive processes for the real exchange rate yield extremely robust and satisfactory estimates.     

Integration or Independence? An Alternative Assessment of Real Interest Rate Linkages in the European Union

The relationship between national real interest rates provides a valuable insight into the extent of economic and financial integration between countries. This paper tests for long‐run parity in ex post real interest rates among the major European Union (EU) countries over the period 1979–2003. The empirical investigation, however, is based on an alternative approach. Strong parity is determined by whether or not the first largest principal component (LPC), based on real interest rate differentials with respect to a chosen base country, is stationary. The qualitative outcome of the test is invariant to the choice of base country, and compared with alternative multivariate tests for long‐run parity, this methodology places less demands on limited data sets. Strong evidence of onshore parity occurs during 1979–1990 and 1993–2003 with the half‐life of a deviation to parity that varies towards 6 months. There is no evidence of long‐run parity among EU members during 1990–1993 despite the easing of remaining capital controls in 1990. Parity is rejected for a sample of non‐EU countries throughout the study period.     

Parity reversion persistence in real exchange rates: middle income country case

This article investigates purchasing power parity (PPP) in the specific context of middle income countries. To circumvent the low power of traditional stationarity tests (Augmented Dickey-Fuller and Phillips-Perron tests), it performs variance ratio and fractional integration tests in addition to Perron's test that accounts for potential structural changes in real exchange rate processes. Beyond estimating half-life shocks to PPP, this article attempts to explain these estimates using a set of country specific variables as suggested by economic theory. The evidence suggests that reversion to parity tends to be faster in high inflation countries and that productivity improvement leads to a higher level of persistence. Openness to trade tends to reduce the extent of deviations from parity but this result does not appear to be statistically robust. Evidence shows also that deviations are less persistent under a fixed exchange rate regime and under unrestricted capital mobility.