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Purchasing power parity and the long memory properties of real exchange rates: Does one size fit all?

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  • Aloy, Marcel
  • Boutahar, Mohamed
  • Gente, Karine
  • Péguin-Feissolle, Anne

Abstract

This paper examines the time series behavior of monthly bilateral real exchange rates (RER) on a comprehensive sample of 78 industrialized and developing countries, using the US Dollar, the UK Pound and the German Deutsche Mark as numeraires. We suggest a three step testing procedure based on recently introduced econometric techniques, in order to assess the mean-reverting properties of the RER and to address the question of whether real exchange rates follow a non linear process or a long memory process. The main results are as follows. Firstly, most of the bilateral real exchange rates under study are not mean-reverting. Secondly, the nonlinear ESTAR type adjustment is far from being prominent. Finally, only few bilateral RER exhibit true long memory mean-reverting properties.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 3 (May)
Pages: 1279-1290

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:3:p:1279-1290

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Fractional Integration Nonlinear modelling Mean reverting process Long-memory process;

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Cited by:
  1. Caporale, Guglielmo Maria & Gil-Alana, Luis A., 2013. "Long memory and fractional integration in high frequency data on the US dollar/British pound spot exchange rate," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 1-9.
  2. Slim Chaouachi & Zied Ftiti & Frédèric Teulon, 2014. "Modelling the Real Exchange Rate: A new Sequential Approach," Working Papers 2014-390, Department of Research, Ipag Business School.

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