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The Long-Run Behavior of the Real Exchange Rate: A Reconsideration

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  • Whitt, Joseph A, Jr

Abstract

Using a new statistical test, this paper provides empirical evidence that the real exchange rate is not a random walk. If the real exchange rate were a random walk, deviations from purchasing power parity could be expected to become unbounded as the forecast horizon became longer. Recently, Christopher A. Sims proposed a test based on Bayesian posterior odds ratios that is designed to discriminate between a unit root and a large but stationary autocorrelation coefficient. This paper applies the Sims test to real exchange rate data for six industrial countries. The results reject the random walk hypothesis. Copyright 1992 by Ohio State University Press.

Suggested Citation

  • Whitt, Joseph A, Jr, 1992. "The Long-Run Behavior of the Real Exchange Rate: A Reconsideration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 72-82, February.
    • Handle: RePEc:mcb:jmoncb:v:24:y:1992:i:1:p:72-82
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    Cited by:

    1. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
    2. Rey, Serge & Varachaud, Pascal, 2000. "Le comportement des taux de change réels européens de la fin Bretton Woods à l’adoption de l’euro [The behavior of European real exchange rates from the Bretton Woods system end to the adoption of ," MPRA Paper 49502, University Library of Munich, Germany.
    3. Jaramillo Franco, Miguel & Serván Lozano, Sergio, 2012. "Modeling exchange rate dynamics in Peru: A cointegration approach using the UIP and PPP," MPRA Paper 70772, University Library of Munich, Germany.
    4. Daniel W. Collins & William K. Salatka, 1993. "Noisy Accounting Earnings Signals and Earnings Response Coefficients: The Case of Foreign Currency Accounting," Contemporary Accounting Research, John Wiley & Sons, vol. 10(1), pages 119-159, September.
    5. Song, Chi-Young, 1997. "The Real Exchange Rate and the Current Account Balance in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 143-184, June.
    6. repec:onb:oenbwp:y::i:28:b:1 is not listed on IDEAS
    7. Meher Manzur & Wing-Keung Wong & Inn-Chau Chee, 1999. "Measuring international competitiveness: experience from East Asia," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1383-1391.
    8. Jacquelynne Mclellan & Debasish Chakraborty, 1997. "Another look at long-run purchasing power parity using Sims tests for unit roots," Applied Economics Letters, Taylor & Francis Journals, vol. 4(8), pages 473-476.
    9. Mariam Camarero & Cecilio Tamarit, 1996. "Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC," Open Economies Review, Springer, vol. 7(1), pages 61-76, January.
    10. Goldberg, Lawrence G. & Gosnell, Thomas F. & Okunev, John, 1997. "Purchasing power parity: Modeling and testing mean reversion," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 949-966, July.
    11. Emmanuel Anoruo & Habtu Braha & Yusuf Ahmad, 2002. "Purchasing power parity: Evidence from developing Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 8(2), pages 85-96, May.
    12. Francis Ahking, 1997. "Testing long-run purchasing power parity with a Bayesian unit root approach: the experience of Canada in the 1950s," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 813-819.
    13. Dimitris Kirikos, 1996. "The role of the forecast-generating process in assessing asset market models of the exchange rate: a non-linear case," The European Journal of Finance, Taylor & Francis Journals, vol. 2(2), pages 125-144.

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