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Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries

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Author Info

  • Mohsen Bahmani-Oskooee

    ()
    (The Center for Research on International Economics and the Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, WI 53201, USA)

  • Ali M. Kutan

    ()
    (Department of Economics and Finance, Southern Illinois University, Edwardsville, IL 62026-1102, USA; The Emerging Markets Group, Sir Cass Business School, 106 Bunhill Row, London EC1Y 8TZ; The William Davidson Institute, University of Michigan, 724 East University Avenue, Wyly Hall, First Floor, Ann Arbor, MI 48109-1234, USA)

  • Su Zhou

    ()
    (Department of Economics, University of Texas at San Antonio, San Antonio, TX 78249-0633, USA)

Abstract

In an effort to fight relatively high inflation, many developing countries try to manage their nominal exchange rates through official intervention. In addition, developing countries tend to have high transportation costs, tariffs, and nontariff barriers. These factors are among the sources of generating nonlinearity in real exchange rates and hence some nonlinear adjustment toward purchasing power parity (PPP) in developing countries. In this paper, we employ monthly real effective exchange rate (REER) data of 88 developing countries and test the null of nonstationarity versus an alternative of linear stationarity by the means of a conventional unit root test and compare the results with those obtained from a new test in which the null is the same but the alternative hypothesis is nonlinear stationarity. The latter test supports the PPP theory in more developing countries compared with the former test, suggesting that nonlinear adjustment toward PPP in developing countries is an important phenomenon. Reported country characterizations indicate that reversion in REER occurs more often for high-inflation countries and for countries with high flexibility in their exchange rates.

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Bibliographic Info

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

Volume (Year): 74 (2008)
Issue (Month): 4 (April)
Pages: 1049-1062

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Handle: RePEc:sej:ancoec:v:74:4:y:2008:p:1049-1062

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Cited by:
  1. Frederick H Wallace & Daniel Ventosa-santaulària & Manuel Gómez-zaldívar, 2014. "Is The Real Effective Exchange Rate Biased Against the PPP Hypothesis?," Economics Bulletin, AccessEcon, vol. 34(1), pages 395-399.
  2. Maican, Florin G. & Sweeney, Richard J., 2006. "Real Exchange Rate Adjustment In European Transition Countries," Working Papers in Economics, University of Gothenburg, Department of Economics 202, University of Gothenburg, Department of Economics.
  3. Giray Gozgor, 2011. "Purchasing power parity hypothesis among the main trading partners of Turkey," Economics Bulletin, AccessEcon, vol. 31(2), pages 1432-1438.
  4. He, Huizhen & Chou, Ming Che & Chang, Tsangyao, 2014. "Purchasing power parity for 15 Latin American countries: Panel SURKSS test with a Fourier function," Economic Modelling, Elsevier, Elsevier, vol. 36(C), pages 37-43.
  5. Cynthia A. Lengnick-Hall & Robert J. Griffith, . "Knowledge Resources, Exploration, and Exploitation: A New Perspective on the Interplay Between Innovation and Application," Working Papers, College of Business, University of Texas at San Antonio 0027, College of Business, University of Texas at San Antonio.
  6. Tsong, Ching-Chuan, 2011. "Testing for a unit root with covariates against nonlinear alternatives," Economic Modelling, Elsevier, Elsevier, vol. 28(3), pages 1226-1234, May.
  7. Kuswanto, Heri & Sibbertsen, Philipp, 2009. "Testing for Long Memory Against ESTAR Nonlinearities," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-427, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  8. Salah Nusair, 2012. "Nonlinear adjustment of Asian real exchange rates," Economic Change and Restructuring, Springer, Springer, vol. 45(3), pages 221-246, August.
  9. Su Zhou & Mohsen Bahmani-Oskooee & Ali M. Kutan, 2008. "Purchasing Power Parity before and after the Adoption of the Euro," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 144(1), pages 134-150, April.
  10. Ricky Chee Jiun Chia & Shiok Ye Lim & Sheue Li Ong, 2014. "Long-Run Validity of Purchasing Power Parity and Cointegration Analysis for Low Income African Countries," Economics Bulletin, AccessEcon, vol. 34(3), pages 1438-1447.
  11. Su, Chi-Wei & Tsangyao, Chang & Chang, Hsu-Ling, 2011. "Purchasing power parity for fifteen Latin American countries: Stationary test with a Fourier function," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(4), pages 839-845, October.
  12. Y. Kahiri & A. Shmilovici & S. Hauser, 2006. "Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm," Computing in Economics and Finance 2006, Society for Computational Economics 256, Society for Computational Economics.
  13. Månsson, Kristofer & Sjölander, Pär, 2014. "Testing for nonlinear panel unit roots under cross-sectional dependency — With an application to the PPP hypothesis," Economic Modelling, Elsevier, Elsevier, vol. 38(C), pages 121-132.
  14. Arize, Augustine C., 2011. "Purchasing power parity in LDCs: An empirical investigation," Global Finance Journal, Elsevier, vol. 22(1), pages 56-71.
  15. He, Huizhen & Chang, Tsangyao, 2013. "Purchasing power parity in transition countries: Sequential panel selection method," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 604-609.
  16. Robert J. Sonora & Josip Tica, 2008. "Structural breaks and Purchasing Power Parity in the CEE and Post-War former Yugoslav States," EFZG Working Papers Series, Faculty of Economics and Business, University of Zagreb 0804, Faculty of Economics and Business, University of Zagreb.
  17. Mohsen Bahmani-Oskooee & Tsangyao Chang & Kuei-Chiu Lee, 2014. "Purchasing Power Parity in the BRICS and the MIST Countries: Sequential Panel Selection Method," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 1-12, Feburary.

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