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Mean Reversion of Real Exchange Rates in High-Inflation Countries

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  • Michael F. Bleaney
  • Stephen J. Leybourne
  • Paul Mizen

Abstract

We test for mean reversion in real exchange rates using data from five countries, four of which have experienced episodes of high inflation. Using monthly data for Argentina, Brazil, Chile, Colombia, and Israel, we find that a stochastic unit root model is typically appropriate (Brazil is the exception). Kalman filter estimates of the stochastic unit roots show sharp deviations from unity associated with high inflation episodes. This suggests that stochastic unit root models are a more appropriate way to model mean reversion in real exchange rates for high inflation countries than models with fixed rates of mean reversion.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 65 (1999)
Issue (Month): 4 (April)
Pages: 839-854

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Handle: RePEc:sej:ancoec:v:65:4:y:1999:p:839-854

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Yoon, Gawon, 2004. "On the existence of expected utility with CRRA under STUR," Economics Letters, Elsevier, Elsevier, vol. 83(2), pages 219-224, May.
  2. Ivan Paya & David A. Peel, 2005. "The Process Followed By Ppp Data. On The Properties Of Linearity Tests," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2005-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Yoon, Gawon, 2005. "Has the U.S. economy really become less correlated with that of the rest of the world?," Economic Modelling, Elsevier, Elsevier, vol. 22(1), pages 147-158, January.
  4. Nagakura, Daisuke, 2009. "Asymptotic theory for explosive random coefficient autoregressive models and inconsistency of a unit root test against a stochastic unit root process," Statistics & Probability Letters, Elsevier, Elsevier, vol. 79(24), pages 2476-2483, December.
  5. Ramaprasad Bhar, 2010. "Stochastic Filtering With Applications In Finance:," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., number 7736.
  6. Daisuke Nagakura, 2009. "Inconsistency of a Unit Root Test against Stochastic Unit Root Processes," IMES Discussion Paper Series 09-E-23, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Marcos José Dal Bianco, 2008. "Argentinean real exchange rate 1900-2006, test purchasing power parity theory," Estudios de Economia, University of Chile, Department of Economics, University of Chile, Department of Economics, vol. 35(1 Year 20), pages 33-64, June.
  8. 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 adopt
    ," MPRA Paper 49502, University Library of Munich, Germany.
  9. Daisuke Nagakura, 2007. "Testing for Coefficient Stability of AR(1) Model When the Null is an Integrated or a Stationary Process," IMES Discussion Paper Series 07-E-20, Institute for Monetary and Economic Studies, Bank of Japan.
  10. Angelos Kanas, 2009. "Real exchange rate, stationarity, and economic fundamentals," Journal of Economics and Finance, Springer, Springer, vol. 33(4), pages 393-409, October.

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