Nonlinear trends in real exchange rates: A panel unit root test approach |
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Authors: | David O Cushman Nils Michael |
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Institution: | aDepartment of Economics and Business, Westminster College, New Wilmington, PA 16172, USA;bBusiness School, Oxford Brookes University, Oxford OX33 1HX, UK;cDepartment of Economics, University of Saskatchewan, Saskatoon, SK S7N 5A5, Canada;dHealth Finance and Information Directorate, The Scottish Government, Edinburgh EH1 3DG, Scotland, UK |
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Abstract: | We analyze the possibility of nonlinear trend stationarity as the alternative to unit roots in 23 OECD real exchange rates, 1974–1998, by adding nonlinear time terms to the CIPS panel unit root test of Pesaran (2007). We follow a thorough bootstrapping approach and propose a technique to adjust statistical significance for the use of multiple tests over several time trend orders. The unit root null that all real exchange rates have unit roots is rejected at better than the 0.05 level. Bootstrapped results from a procedure of Chortareas and Kapetanios (2009) suggest that the hypothesis that all are stationary is reasonable. We argue that nonlinear trend stationarity is the most likely alternative hypothesis for at least some of the real exchange rates because: (1) the strongest CIPS rejection occurs when quadratic trends are specified; (2) nonlinear time terms are statistically significant at the 0.10 level; (3) the actual CIPS statistics are more consistent with CIPS sampling distributions from bootstrapped nonlinear trend stationary processes than from linear trend or mean stationary processes. |
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Keywords: | Real exchange rates Nonlinear-trend stationarity Panel unit root tests Purchasing power parity |
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