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New Multi-Country Evidence on Purchasing Power Parity: Multi-Variate Unit Root Test Results

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  • Jan J. J. Groen

    (Erasmus University Rotterdam)

Abstract

In this paper a likelihood-based multi-variate unit root testing framework is utilized to test whether the real exchange rates of G10 countries are non-stationary. The framework uses a likelihood ratio statistic which combines the information across all involved countries while retaining heterogeneous rates of mean reversion. This likelihood ratio statistic has an asymptotic distribution which can be typified as a summation of squared, univariate Dickey and Fuller (1979) distributions. Our multi-variate unit root tests indicate that bilateral G10 real exchange rates are stationary, irrespective of the numeraire country. On the other hand, the choice of the numeraire country seems to be of importance for the issue whether mean reversion rates across G10 real exchange rates are heterogeneous or homogeneous.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0269.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0269

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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  2. O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February.
  3. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  4. Pierre Perron & Robert J. Shiller, 1984. "Testing the Random Walk Hypothesis: Power Versus Frequency of Observation," Cowles Foundation Discussion Papers 732, Cowles Foundation for Research in Economics, Yale University.
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  7. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November.
  8. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  9. Hakkio, Craig S., 1984. "A re-examination of purchasing power parity : A multi-country and multi-period study," Journal of International Economics, Elsevier, vol. 17(3-4), pages 265-277, November.
  10. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
  11. Bent Nielsen, 1995. "Bartlett correction of the unit root test in autoregressive models," Economics Papers 11 & 98., Economics Group, Nuffield College, University of Oxford.
  12. Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August.
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  14. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
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  17. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
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