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Higher Power Tests for Bilateral Failure of PPP after 1973

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  • Graham Elliott
  • Elena Pesavento

Abstract

Whilst point estimates for mean reversion in real exchange rates suggest reasonable (but long) half lives to shocks, it still remains uncomfortable that models without any mean reversion at all are often compatible with individual country pair data from the floating period. Studies with data over longer periods find mean reversion, but at the cost of mixing in data from earlier exchange rate arrangements. Pooling the floating period data for a number of countries also finds evidence of mean reversion, but at the expense of potentially mixing in country pairs with and without mean reversion. We examine tests for mean reversion for individual country pairs where greater power against close alternatives is gained through modeling other economic variables with the real exchange rate. Our results are broadly consistent with other methods to improve the power of tests for unit roots in real exchange rates, finding support for the mean reversion hypothesis.

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Bibliographic Info

Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0502.

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Date of creation: Jan 2005
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Handle: RePEc:emo:wp2003:0502

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  1. Cheung, Yin-Wong & Lai, Kon S., 2000. "On cross-country differences in the persistence of real exchange rates," Journal of International Economics, Elsevier, vol. 50(2), pages 375-397, April.
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  10. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
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Citations

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Cited by:
  1. Lee, Cheng-Feng & Tsong, Ching-Chuan, 2009. "Bootstrapping covariate stationarity tests for inflation rates," Economic Modelling, Elsevier, vol. 26(6), pages 1443-1448, November.
  2. Rossi, Barbara, 2005. "Confidence Intervals for Half-Life Deviations From Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 432-442, October.
  3. Alba, Joseph D. & Papell, David H., 2007. "Purchasing power parity and country characteristics: Evidence from panel data tests," Journal of Development Economics, Elsevier, vol. 83(1), pages 240-251, May.
  4. Tsong, Ching-Chuan, 2011. "Testing for a unit root with covariates against nonlinear alternatives," Economic Modelling, Elsevier, vol. 28(3), pages 1226-1234, May.

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