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PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-Sectional Dependency and Structural Breaks

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  • Mark Holmes

    ()

  • Jesús Otero

    ()

  • Theodore Panagiotidis

    ()

Abstract

The stationarity of OECD real exchange rates over the period 1972–2008 is tested using a panel of 26 member countries. The methodology followed stems from the need to meet several key concerns: (i) the identification of which panel members are stationary; (ii) the presence of cross-sectional dependence among the countries in the panel; and (iii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ a recent test that examines the time series properties of the data within a panel framework, namely the Hadri and Rao (Oxford Bulletin of Economics and Statistics 70: 245–269, 2008 ) panel stationarity test. The real exchange rates of the 26 OECD countries are found to be stationary when considered as a panel, but only after allowing for endogenously-determined structural breaks and cross section dependence. We also find that once these structural breaks are removed from the underlying series, the half-life of shocks to the real exchange rate is much shorter than has been calculated in earlier studies. Copyright Springer Science+Business Media, LLC 2012

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 23 (2012)
Issue (Month): 5 (November)
Pages: 767-783

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Handle: RePEc:kap:openec:v:23:y:2012:i:5:p:767-783

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: Heterogeneous dynamic panels; Purchasing power parity; Mean reversion; Panel stationarity test; F31; F33; G15;

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