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Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current float?

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Listed:
  • Christopher F. Baum

    (Boston College)

  • John T. Barkoulas

    (Louisiana Tech University)

  • Mustafa Caglayan

    (Koc University)

Abstract

This paper considers two potential rationales for the apparent absence of mean reversion in real exchange rates in the post-Bretton Woods era. We allow for (i) fractional integration and (ii) a double mean shift in the real exchange rate process. These methods, applied to CPI-based rates for 17 countries and WPI-based rates for 12 countries, demonstrate that the unit-root hypothesis is robust against both fractional alternatives and structural breaks. This evidence suggests rejection of the doctrine of absolute long-run purchasing power parity during the post-Bretton Woods era.

Suggested Citation

  • Christopher F. Baum & John T. Barkoulas & Mustafa Caglayan, 1998. "Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current float?," Boston College Working Papers in Economics 380, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:380
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    More about this item

    Keywords

    purchasing power parity; long memory; structural breaks;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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