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Is There a Base Currency Effect in Long-Run PPP?

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  • Coakley, Jerry
  • Fuertes, Ana-Marie

Abstract

The base currency effect in the purchasing power parity (PPP) literature refers to the stylized fact that tests on German mark real exchange rates are more likely to support mean reversion than analogous tests on US dollar rates. Using a panel of 19 OECD currencies, 1973-97, we employ different panel unit root approaches to investigate the view that this effect can be attributed to neglected cross-sectional dependence. While the results from panel methods which permit cross-sectional dependence and heterogeneous serial correlation generally support long-run PPP, they provide no evidence of a base currency effect. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

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Bibliographic Info

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

Volume (Year): 5 (2000)
Issue (Month): 4 (October)
Pages: 253-63

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Handle: RePEc:ijf:ijfiec:v:5:y:2000:i:4:p:253-63

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Web page: http://www.interscience.wiley.com/jpages/1076-9307/

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Cited by:
  1. Christoph Fischer, 2006. "PPP: a disaggregated view," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 93-108.
  2. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
  3. Caporale, Guglielmo Maria & Cerrato, Mario, 2004. "Panel Data Tests of PPP. A Critical Overview," Economics Series 159, Institute for Advanced Studies.
  4. Cerrato, Mario & Sarantis, Nicholas, 2007. "A bootstrap panel unit root test under cross-sectional dependence, with an application to PPP," Computational Statistics & Data Analysis, Elsevier, vol. 51(8), pages 4028-4037, May.
  5. Fischer, Christoph, 2007. "An assessment of the trends in international price competitiveness among EMU countries," Discussion Paper Series 1: Economic Studies 2007,08, Deutsche Bundesbank, Research Centre.
  6. Fischer, Christoph, 2012. "Price convergence in the EMU? Evidence from micro data," European Economic Review, Elsevier, vol. 56(4), pages 757-776.
  7. Julián Ramajo Hernández(1) & Montserrat Ferré Carracedo(2), . "Testing For Long-Run Purchasing Power Parity In The Post Bretton Woods Era: Evidence From Old And New Tests," Working Papers 24-05 Classification-JEL , Instituto de Estudios Fiscales.
  8. Fischer, Christoph & Porath, Daniel, 2006. "A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications," Discussion Paper Series 1: Economic Studies 2006,23, Deutsche Bundesbank, Research Centre.
  9. Coakley, Jerry & Fuertes, Ana-Maria, 2001. "Border costs and real exchange rate dynamics in Europe," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 669-676, August.
  10. Holmes, Mark J., 2001. "New Evidence on Real Exchange Rate Stationarity and Purchasing Power Parity in Less Developed Countries," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 601-614, October.

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