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Real exchange rates may have nonlinear trends

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  • David O. Cushman

Abstract

The unit root null is tested against possible nonlinear-trend stationarity for 13 US and German bilateral real exchange rates over the floating exchange rate period. Eight tests specified with nonlinear trends are applied. Simulations are used to determine individual and joint significance levels and to help interpret the results. Unit roots can be rejected for a number of the exchange rates, and nonlinear-trend stationarity appears more plausible than mean or linear-trend stationarity as the alternative. In several cases, estimates of the trends support the nonlinear-trend conclusion with statistical and economic significance. Thus, purchasing power parity is probably violated, but real exchange rates have meaningful long-run equilibrium values. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.322
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 13 (2008)
Issue (Month): 2 ()
Pages: 158-173

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Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:2:p:158-173

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Cited by:
  1. Cristina Terra, Frederico Valladares, 2009. "Real Exchange Rate Misalignments," THEMA Working Papers 2009-03, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Luis A. Gil-Alana & Juan Carlos Cuestas, 2012. "A Non-linear Approach with Long Range Dependence based on Chebyshev Polynomials," Faculty Working Papers 14/12, School of Economics and Business Administration, University of Navarra.
  3. Cushman, David O. & Michael, Nils, 2011. "Nonlinear trends in real exchange rates: A panel unit root test approach," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1619-1637.
  4. Juan Carlos Cuestas & Paulo José Regis, 2008. "Testing for PPP in Australia: Evidence from unit root test against nonlinear trend stationarity alternatives," Economics Bulletin, AccessEcon, vol. 3(27), pages 1-8.
  5. Juan Carlos Cuestas & Estefania Mourelle, 2008. "Nonlinearities in real exchange rate determination: do African exchange rates follow a radom walk?," Working Papers 2008/8, Nottingham Trent University, Nottingham Business School, Economics Division.
  6. repec:ebl:ecbull:v:3:y:2008:i:27:p:1-8 is not listed on IDEAS
  7. Jean-Francois Hoarau, 2010. "Does long-run purchasing power parity hold in Eastern and Southern African countries? Evidence from panel data stationary tests with multiple structural breaks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 307-315.
  8. Cushman, David O., 2008. "Long-run PPP in a system context: No favorable evidence after all for the U.S., Germany, and Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 413-424, December.

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