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Are The Real Exchange Rate Indices of Australia Non-Stationary in the Presence of Structural Break?

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Author Info
Chowdhury, Khorshed () (University of Wollongong)
Abstract

This paper examines the time series properties of real exchange rate indices of Australia in the presence of structural break. Traditional unit root procedures have low power when structural break is ignored. By including structural change in the data, Perron’s (1997) Additive Outlier model was found optimal. Three indices (Trade-weighted index (TWI), Export-weighted index (EWI) and Import-weighted index (IWI) are found to be stationary while G7 GDP-weighted index (G7WI) was found non-stationary. The estimated break dates correspond to the period of huge real GDP downturn in Australia (early 1990s), and the global recession in the early 1980s affecting the G7 countries.

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File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/web/uow021424.pdf
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Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp07-05.

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Length: 23 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:uow:depec1:wp07-05

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Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
Phone: +612 4221-3663
Fax: +612 4221-3725
Web page: http://www.uow.edu.au/commerce/econ/
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Related research
Keywords: Real exchange rate; purchasing power parity; unit root; structural break.;

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  2. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May. [Downloadable!] (restricted)
  3. McKenzie, Ian M, 1986. "Australia's Real Exchange Rate during the Twentieth Century," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 69-78, Supplemen.
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  6. Luci Ellis, 2001. "Measuring the Real Exchange Rate: Pitfalls and Practicalities," RBA Research Discussion Papers rdp2001-04, Reserve Bank of Australia. [Downloadable!]
  7. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22. [Downloadable!]
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  8. Vogelsang, T.I. & Perron, P., 1991. "Nonstationary and Level Shifts With An Application To Purchasing Power Parity," Papers 359, Princeton, Department of Economics - Econometric Research Program.
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  9. David Gruen & Geoffrey Shuetrim, 1994. "Internationalisation and the Macroeconomy," RBA Annual Conference Volume, in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia. [Downloadable!]
  10. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation, Yale University. [Downloadable!]
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  11. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October. [Downloadable!] (restricted)
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  12. Adrian Blundell-Wignall & Robert G. Gregory, 1990. "Exchange Rate Policy in Advanced Commodity-Exporting Countries: The Case of Australia and New Zealand," OECD Economics Department Working Papers 83, OECD, Economics Department. [Downloadable!]
  13. Debabrata Bagchi & Georgios E. Chortareas & Stephen M. Miller, 2004. "The Real Exchange Rate in Small, Open, Developed Economies: Evidence from Cointegration Analysis," The Economic Record, The Economic Society of Australia, vol. 80(248), pages 76-88, 03. [Downloadable!] (restricted)
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