Persistence in Turkish Real Exchange Rates: Panel Approaches
AbstractTesting whether real exchange rates are stationary and, thereby, obtaining evidence of whether the absolute version of the purchasing power parity (PPP) hypothesis holds, have, initially, be done by using the ADF statistic to test for a unit root. Subsequently, to mitigate the low power of the ADF test, several alternatives have been used for the same purpose. Panel unit root testing is one of these alternatives. In Erlat (2003), I had previously considered two other alternatives; namely, introducing multiple structural shifts in the deterministic terms and fractional integration, in the context of the two primary bilateral Turkish real exchange rates; the $US and the German DM based rates. This investigation did indicate that these two rates may, in fact, be taken to be stationary with significant long-memory components. In the present paper, I utilise panel procedures to see if they, also, give corroborating evidence. I used monthly data for the period 1984.01-2001.06 and constructed a panel of 17 bilateral CPI-based real exchange rates corresponding to Turkey's main trading partners for which complete data were available. I implemented seven panel procedures. The first two, Levin, Lin and Chu (LLC) (2002) and Im, Pesaran and Shin (IPS) (2003) are the most commonly used procedures. LLC assumes a common coefficient for the lagged dependent variable in the autoregressions while IPS recognises the full heterogeneity of the coefficients. The third procedure utilised, Hadri (2000), also assumes full heterogeneity but has stationarity as its null hypothesis. These three procedures take account of the dependence between the series that make up the panel by subtracting the means obtained for each time period across cross sections, from the observations. On the other hand, the remaining four procedures, due to Taylor and Sarno (TS) (1998), Breuer, McNown and Wallace (BMW) (2001), Pesaran (P) (2007)and Bai and Ng (BN) (2004a) handle the problem of dependence in a somewhat more elaborate manner. TS and BMW do this by considering the autoregressions corresponding to each series as set of seemingly unrelated regressions. TS consider a joint test of a unit root while BMW consider individual tests, thereby complementing each other. P and BN, on the other hand, assume that there is a common factor in the panel of series. P adds this common factor, proxied by the time-wise mean, as a regressor to the autoregressions and performs the ADF test while BN decompose the series into this common factor and the idiosyncratic components and test for a unit root in both components, thereby enabling us to determine the source of the persistence if it exists. Of these seven procedures, LLC and IPS lead to the rejection of the null hypothesis of a unit root, while Hadri, TS and BMW do not. The LLC result has the, rather sharp, implication that all 17 series are stationary which, obviously, is not realistic. The IPS result, on the other hand, implies that, at least one series is stationary. This is corroborated by individual ADF tests for, say, the UK, Italy, France, the Netherlands and Belgium based series. The same corroboration is, however, lacking from the other panel approaches, implying that the evidence about the stationarity of the Turkish real exchange rate is mixed and not very strong if panel procedures are used alone as an alternative to univariate ADF tests. Structural shifts in the deterministic terms may need to be introduced into these procedures to obtain stronger evidence of stationarity but this is the subject of further research.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by FIW in its series FIW Working Paper series with number 029.
Date of creation: Feb 2009
Date of revision:
Contact details of provider:
Postal: FIW Project Office Austrian Institute of Economic Research Arsenal Objekt 20 A-1030 Vienna
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Renato Flôres & Philippe Jorion & Pierre-Yves Preumont & Ariane Szafarz, 1999.
"Multivariate Unit root Tests of the PPP Hypothesis,"
ULB Institutional Repository
2013/711, ULB -- Universite Libre de Bruxelles.
- Flores, Renato & Jorion, Philippe & Preumont, Pierre-Yves & Szafarz, Ariane, 1999. "Multivariate unit root tests of the PPP hypothesis," Journal of Empirical Finance, Elsevier, vol. 6(4), pages 335-353, October.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991.
"Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?,"
Cowles Foundation Discussion Papers
979, Cowles Foundation for Research in Economics, Yale University.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
- Tom Doan, . "KPSS: RATS procedure to perform KPSS (Kwiatowski, Phillips, Schmidt, and Shin) stationarity test," Statistical Software Components RTS00100, Boston College Department of Economics.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
- Newey, Whitney K & West, Kenneth D, 1994.
"Automatic Lag Selection in Covariance Matrix Estimation,"
Review of Economic Studies,
Wiley Blackwell, vol. 61(4), pages 631-53, October.
- Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers 0144, National Bureau of Economic Research, Inc.
- Hegwood, Natalie D & Papell, David H, 1998. "Quasi Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-89, October.
- Breuer, Janice Boucher & McNown, Robert & Wallace, Myles S, 2001. "Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 482-93, August.
- Pesaran, M.H., 2003.
"A Simple Panel Unit Root Test in the Presence of Cross Section Dependence,"
Cambridge Working Papers in Economics
0346, Faculty of Economics, University of Cambridge.
- M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
- Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, .
"Testing for PPP: Should We Use Panel Methods?,"
186, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- 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.
- Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06.
- James G. MacKinnon, 1995.
"Numerical Distribution Functions for Unit Root and Cointegration Tests,"
918, Queen's University, Department of Economics.
- MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
- Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
- MOON, Hyungsik Roger & PERRON, Benoit., 2002.
"Testing for a Unit Root in Panels with Dynamic Factors,"
Cahiers de recherche
2002-18, Universite de Montreal, Departement de sciences economiques.
- Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
- Luintel, Kul B, 2001. "Heterogeneous Panel Unit Root Tests and Purchasing Power Parity," Manchester School, University of Manchester, vol. 69(0), pages 42-56, Supplemen.
- Haluk Erlat, 2004. "Unit roots or nonlinear stationarity in Turkish real exchange rates," Applied Economics Letters, Taylor and Francis Journals, vol. 11(10), pages 645-650.
- Shin, Yongcheol, 1994. "A Residual-Based Test of the Null of Cointegration Against the Alternative of No Cointegration," Econometric Theory, Cambridge University Press, vol. 10(01), pages 91-115, March.
- 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.
- M. Hashem Pesaran, 2006.
"Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure,"
Econometric Society, vol. 74(4), pages 967-1012, 07.
- M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
- Jushan Bai & Serena Ng, 2000.
"Determining the Number of Factors in Approximate Factor Models,"
Boston College Working Papers in Economics
440, Boston College Department of Economics.
- Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
- Matthew Higgins & Egon Zakrajsek, 2000.
"Purchasing power parity: three stakes through the heart of the unit root null,"
Finance and Economics Discussion Series
2000-22, Board of Governors of the Federal Reserve System (U.S.).
- Matthew Higgins & Egon Zakrajsek, 1999. "Purchasing power parity: three stakes through the heart of the unit root null," Staff Reports 80, Federal Reserve Bank of New York.
- Kaddour Hadri, 1999.
"Testing For Stationarity In Heterogeneous Panel Data,"
1999_04, University of Liverpool Management School.
- Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
- Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002.
"Unit root tests in panel data: asymptotic and finite-sample properties,"
Journal of Econometrics,
Elsevier, vol. 108(1), pages 1-24, May.
- Tom Doan, . "LEVINLIN: RATS procedure to perform Levin-Lin-Chu test for unit roots in panel data," Statistical Software Components RTS00242, Boston College Department of Economics.
- Groen, J.J.J., 2000.
"New multi-country evidence on purchasing power parity: multivariate unit root test results,"
Econometric Institute Report
EI 2000-09/A, Erasmus University Rotterdam, Econometric Institute.
- Jan J. J. Groen, 2000. "New Multi-Country Evidence on Purchasing Power Parity: Multi-Variate Unit Root Test Results," Econometric Society World Congress 2000 Contributed Papers 0269, Econometric Society.
- Caner, Mehmet & Kilian, Lutz, 2000.
"Size Distortions Of Tests Of The Null Hypothesis Of Stationarity: Evidence And Implications For The PPP Debate,"
CEPR Discussion Papers
2425, C.E.P.R. Discussion Papers.
- Caner, M. & Kilian, L., 2001. "Size distortions of tests of the null hypothesis of stationarity: evidence and implications for the PPP debate," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 639-657, October.
- Kilian, L. & Caner, M., 1999. "Size Distortions of Tests of the Null Hypothesis of Stationarity: Evidence and Implications for the PPP Debate," Papers 99-05, Michigan - Center for Research on Economic & Social Theory.
- Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
- Jörg Breitung & Samarjit Das, 2005.
"Panel unit root tests under cross-sectional dependence,"
Netherlands Society for Statistics and Operations Research, vol. 59(4), pages 414-433.
- Samarjit Das & Joerg Breitung, 2004. "Panel Unit Root Tests under Cross- sectional Dependence," Econometric Society 2004 North American Summer Meetings 55, Econometric Society.
- 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.
- Breuer, Janice Boucher & McNown, Robert & Wallace, Myles, 2002. " Series-Specific Unit Root Tests with Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(5), pages 527-46, December.
- Christophe Hurlin & Valérie Mignon, 2007. "Second Generation Panel Unit Root Tests," Working Papers halshs-00159842, HAL.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.