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Is the evidence for PPP reliable? A sustainability examination of the stationarity of real exchange rates

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  • Zhou, Su
  • Kutan, Ali M.

Abstract

Some recent time series studies testing the stationarity of real exchange rates (RERs) produce conflicting results. Using nonlinear unit root tests and recursive analysis, this paper tests whether the evidence on the stationarity of RERs is sensitive to different numeraire currencies, different sample periods covering regional and global crises, and the inclusion of countries with different levels of economic or regional integration. The results indicate that evidence for a stationary RER could be substantially sensitive to sample period changes, but not so for the currencies of the countries involved in forming the euro area. We also find that financial crises have a notable impact on testing the stationarity of RERs, depending on the numeraire currency used. We discuss the policy implications of the findings.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 2479-2490

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:9:p:2479-2490

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Related research

Keywords: Purchasing power parity Real exchange rates Nonlinear stationarity Recursive analysis;

References

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Cited by:
  1. Aziz Hayat & Bahodir Ganiev & Xueli Tang, 2012. "Expectations of future income and real exchange rate movements," Financial Econometics Series, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance 2012_05, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  2. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Boršič, Darja, 2013. "Real interest parity in Central and Eastern European countries: Evidence on integration into EU and the US markets," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 25(C), pages 163-180.
  3. Su, Jen-Je & Cheung, Adrian (Wai-Kong) & Roca, Eduardo, 2014. "Does Purchasing Power Parity hold? New evidence from wild-bootstrapped nonlinear unit root tests in the presence of heteroskedasticity," Economic Modelling, Elsevier, vol. 36(C), pages 161-171.
  4. Hayat, Aziz & Ganiev, Bahodir & Tang, Xueli, 2013. "Expectations of future income and real exchange rate movements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(4), pages 1274-1285.
  5. Mohamed El Hedi Arouri & Christophe Rault & Anamaria Sova & Robert Sova & Frédéric Teulon, 2014. "Market Structure and the Cost of," Working Papers 2014-351, Department of Research, Ipag Business School.

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