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Are shocks to real effective exchange rates permanent or transitory? Evidence from Pacific Island countries

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  • Paresh Kumar Narayan
  • Biman Chand Prasad

Abstract

In this article, we consider the stability of the real effective exchange rates for four Pacific Island countries using the Lee and Strazicich (2003a, b) unit root test, which allows one to incorporate at most two structural breaks in the data series. Our main finding is that for Papua New Guinea and Samoa, exchange rates are stable, implying that shocks will have a transitory effect on real effective exchange rates, while for Fiji and the Solomon Islands we find exchange rates to be unstable, implying that shocks will have a permanent effect on real effective exchange rates.

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  • Paresh Kumar Narayan & Biman Chand Prasad, 2008. "Are shocks to real effective exchange rates permanent or transitory? Evidence from Pacific Island countries," Applied Economics, Taylor & Francis Journals, vol. 40(8), pages 1053-1060.
    • Handle: RePEc:taf:applec:v:40:y:2008:i:8:p:1053-1060
    DOI: 10.1080/00036840600771122
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