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PPP in OECD countries: An analysis of real exchange rate stationarity, cross-sectional dependency and strucutral breaks

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The stationarity of OECD real exchange rates over the period 1972-2008 is tested using a panel of twenty six member countries. The methodology followed stems from the need to meet several key concerns: (i) the identification of which panel members are stationary; (ii) the presence of cross-sectional dependence among the countries in the panel; and (iii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ a recent test that examines the time series properties of the data within a panel framework, namely the Hadri and Rao (2008) panel stationarity test. The real exchange rates of the twenty six OECD countries are found to be stationary when considered as a panel, but only after allowing for endogenously-determined structural breaks and cross section dependence. We also find that once these structural breaks are removed from the underlying series, the half-life of shocks to the real exchange rate is much shorter than has been calculated in earlier studies.

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Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2011_17.

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Date of creation: Nov 2011
Date of revision: Nov 2011
Handle: RePEc:mcd:mcddps:2011_17

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Keywords: Panel data; cross-section dependence; pair-wise approach; house prices; convergence.;

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