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Real Exchange Rate Dynamics Under The Current Float: A Re-Examination

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Author Info

  • Michael Bleaney

    (University of Nottingham)

  • Stephen J. Leybourne

    (University of Nottingham)

Abstract

Augmented Dickey-Fuller regressions on pooled (but not individual) real exchange rates for the post-1973 period consistently reject the unit root null, even after accounting for cross-sectional dependence. The inference that the series is stationary, however, is not necessarily correct, because these tests strongly over-reject the null in certain circumstances, particularly when the series has a stochastic unit root. We find that bilateral real exchange rates against the US dollar have a stochastic unit root. Out-of-sample prediction exercises for an autoregressive model confirm these findings. Copyright 2003 Blackwell Publishing Ltd and The Victoria University of Manchester.

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 71 (2003)
Issue (Month): 2 (03)
Pages: 156-171

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Handle: RePEc:bla:manchs:v:71:y:2003:i:2:p:156-171

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Cited by:
  1. Ivan Paya & David Peel, 2005. "The process followed by PPP data. On the properties of linearity tests," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2515-2522.
  2. Nagakura, Daisuke, 2009. "Asymptotic theory for explosive random coefficient autoregressive models and inconsistency of a unit root test against a stochastic unit root process," Statistics & Probability Letters, Elsevier, vol. 79(24), pages 2476-2483, December.
  3. Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2013. "Equilibrium exchange rate determination and multiple structural changes," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 52-66.
  4. Ziesemer,Thomas, 2005. "How to cure the trade balance? Reducing budget deficits versus devaluations in the presence of J- and W-curves for Brazil," Research Memorandum 018, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
  5. Daisuke Nagakura, 2009. "Inconsistency of a Unit Root Test against Stochastic Unit Root Processes," IMES Discussion Paper Series 09-E-23, Institute for Monetary and Economic Studies, Bank of Japan.
  6. Daisuke Nagakura, 2007. "Testing for Coefficient Stability of AR(1) Model When the Null is an Integrated or a Stationary Process," IMES Discussion Paper Series 07-E-20, Institute for Monetary and Economic Studies, Bank of Japan.

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