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A reappraisal of parity reversion for UK real exchange rates

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  • Nuno Crato
  • Philip Rothman

Abstract

We apply a new approach to test the long-run purchasing power parity theory of real exchange rate movements for the UK. The question of whether real exchange rates have a unit root or are mean reverting is set in the more general framework of fractionally differenced time-series models. Our results suggest that in the current period of floating rates, UK real exchange rates return to parity in the long run.

Suggested Citation

  • Nuno Crato & Philip Rothman, 1994. "A reappraisal of parity reversion for UK real exchange rates," Applied Economics Letters, Taylor & Francis Journals, vol. 1(9), pages 139-141.
    • Handle: RePEc:taf:apeclt:v:1:y:1994:i:9:p:139-141
    DOI: 10.1080/135048594357970
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    References listed on IDEAS

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    1. Cheung, Yin-Wong & Diebold, Francis X., 1994. "On maximum likelihood estimation of the differencing parameter of fractionally-integrated noise with unknown mean," Journal of Econometrics, Elsevier, vol. 62(2), pages 301-316, June.
    2. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-1271, December.
    3. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
    4. Diebold, Francis X. & Rudebusch, Glenn D., 1991. "On the power of Dickey-Fuller tests against fractional alternatives," Economics Letters, Elsevier, vol. 35(2), pages 155-160, February.
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    Cited by:

    1. Hualde, J. & Robinson, Peter M., 2006. "Root-n-consistent estimation of weak fractional cointegration," LSE Research Online Documents on Economics 4542, London School of Economics and Political Science, LSE Library.
    2. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
    3. Javier Hualde & Peter M Robinson, 2006. "Root-N-Consistent Estimation Of Weakfractional Cointegration," STICERD - Econometrics Paper Series 499, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Hualde, J. & Robinson, P.M., 2007. "Root-n-consistent estimation of weak fractional cointegration," Journal of Econometrics, Elsevier, vol. 140(2), pages 450-484, October.
    5. Gael Martin, 2001. "Bayesian Analysis Of A Fractional Cointegration Model," Econometric Reviews, Taylor & Francis Journals, vol. 20(2), pages 217-234.
    6. Javier Hualde & Morten {O}rregaard Nielsen, 2022. "Fractional integration and cointegration," Papers 2211.10235, arXiv.org.

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