The Yen Real Exchange Rate May Be Stationary after All: Evidence from Nonlinear Unit-Root Tests
AbstractThe empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The yen real exchange rate behavior, as compared to other major currencies, has most stubornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non-linear version of the Augmented Dickey-Fuller test, based on an exponentially smooth-transition autogregressive model (ESTAR) that enhances the power of the tests against mean-reverting nonlinear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post-Bretton Woods era. Thus, the real yen behavior may not be so different after all but simply perceived to be so due to the use of a restrictive alternative hypothesis in previous tests.
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Bibliographic InfoPaper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 484.
Date of creation: Jan 2003
Date of revision:
PPP; Yen; Real exchange rates; Nonlinear models; ESTAR models;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-01-19 (All new papers)
- NEP-ETS-2003-01-19 (Econometric Time Series)
- NEP-IFN-2003-01-19 (International Finance)
- NEP-RMG-2003-01-19 (Risk Management)
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