Nonlinear Trend Stationarity in Real Exchange Rates: Evidence from Nonlinear ADF tests
In this article we test for unit root in real exchange rates during the recent floating exchange rate period. In doing so, we use the unit root tests proposed by Bierens (1997a) and Bierens (1997b) that have drift hypothesis against a very general trend stationarity hypothesis, namely the alternative that the time series is stationarity about an almost arbitrary deterministic function of time. Bierens approach employs the fact that any function of time can be approximately arbitrary close by a linear function of Chebishev polynomials. The application of the tests to real exchange rate series indicate that these series are nonlinear trend stationary, and therefore, we conclude that the real exchange rate behavior may not be so different after all but simply perceived to be so because of the use of previously different unit root tests.
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