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Is the evidence for PPP reliable? A sustainability examination of the stationarity of real exchange rates

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  • Zhou, Su
  • Kutan, Ali M.

Abstract

Some recent time series studies testing the stationarity of real exchange rates (RERs) produce conflicting results. Using nonlinear unit root tests and recursive analysis, this paper tests whether the evidence on the stationarity of RERs is sensitive to different numeraire currencies, different sample periods covering regional and global crises, and the inclusion of countries with different levels of economic or regional integration. The results indicate that evidence for a stationary RER could be substantially sensitive to sample period changes, but not so for the currencies of the countries involved in forming the euro area. We also find that financial crises have a notable impact on testing the stationarity of RERs, depending on the numeraire currency used. We discuss the policy implications of the findings.

Suggested Citation

  • Zhou, Su & Kutan, Ali M., 2011. "Is the evidence for PPP reliable? A sustainability examination of the stationarity of real exchange rates," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2479-2490, September.
  • Handle: RePEc:eee:jbfina:v:35:y:2011:i:9:p:2479-2490
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    Cited by:

    1. Hayat, Aziz & Ganiev, Bahodir & Tang, Xueli, 2013. "Expectations of future income and real exchange rate movements," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1274-1285.
    2. Rod Tyers & Ying Zhang, 2014. "Real exchange rate determination and the China puzzle," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 28(2), pages 1-32, November.
    3. Su, Jen-Je & Cheung, Adrian (Wai-Kong) & Roca, Eduardo, 2014. "Does Purchasing Power Parity hold? New evidence from wild-bootstrapped nonlinear unit root tests in the presence of heteroskedasticity," Economic Modelling, Elsevier, vol. 36(C), pages 161-171.
    4. Jeremy Nguyen & Jen-je Su, 2015. "Combining linear and nonlinear unit root tests with an application to PPP," Economics Bulletin, AccessEcon, vol. 35(4), pages 2796-2801.
    5. Kutan, Ali M. & Zhou, Su, 2015. "PPP may hold better than you think: Smooth breaks and non-linear mean reversion in real effective exchange rates," Economic Systems, Elsevier, vol. 39(2), pages 358-366.
    6. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Boršič, Darja, 2013. "Real interest parity in Central and Eastern European countries: Evidence on integration into EU and the US markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 163-180.
    7. repec:ipg:wpaper:2014-351 is not listed on IDEAS
    8. repec:eee:intfin:v:49:y:2017:i:c:p:15-31 is not listed on IDEAS
    9. repec:bla:pacecr:v:22:y:2017:i:4:p:510-532 is not listed on IDEAS

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