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A Bayesian analysis of the unit root in real exchange rates

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  • Schotman, Peter
  • van Dijk, Herman K.

Abstract

We propose a posterior odds analysis of the hypothesis of a unit root in real exchange rates. From a Bayesian viewpoint the random walk hypothesis for real exchange rates is a posteriori as probable as a stationary AR(1) process for four out of eight time series investigated. The French franc / German Dmark is clearly stationary, while the Japanese yen / US dollar is most likely a random walk.' In contrast, classical tests are unable to reject the unit root for any of these series.
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  • Schotman, Peter & van Dijk, Herman K., 1991. "A Bayesian analysis of the unit root in real exchange rates," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 195-238.
    • Handle: RePEc:eee:econom:v:49:y:1991:i:1-2:p:195-238
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