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The Yen Real Exchange Rate May Not Be Stationary After All: New Evidence from Non-linear Unit-Root Tests

  • Hyeongwoo Kim
  • Young-Kyu Moh

Researchers have encountered difficulties in finding empirical evidence of Purchasing Power Parity (PPP) especially when conventional linear unit root tests are employed for the Japanese yen real exchange rate. Chortareas and Kapetanios (2004), however, report strong evidence in favor of a Balassa-Samuelson type model of PPP by applying a nonlinear unit root test by Kapetanios et al. (2003) for the other G7 and Asian currencies relative to the Japanese yen, claiming that the yen real exchange rate may be (trend) stationary. We question the validity of this remark. First, we note that their claim is upset when we extend the data until 2008 even when the same nonlinear unit root test is used. Second, we apply the inf-t test by Park and Shintani (2005, 2010) which does not require the Taylor approximation, and find strong evidence against nonstationarity for most yen real exchange rates. Our results also corroborate the findings of Kim and Moh (2010) who report a possibility of misspecification problems with the use of Taylor-approximation based tests.

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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2012-02.

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Date of creation: Apr 2012
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Handle: RePEc:abn:wpaper:auwp2012-02
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  1. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
  2. Mario J. Crucini & Mototsugu Shintani, 2006. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0616, Vanderbilt University Department of Economics.
  3. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
  4. Alan M. Taylor, 2002. "A Century Of Purchasing-Power Parity," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 139-150, February.
  5. Frederic Bec & Melika Ben Salem & Marine Carrasco, 2004. "Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 382-395, October.
  6. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
  7. Joon Y. Park & Mototsugu Shintani, 2005. "Testing for a Unit Root against Transitional Autoregressive Models," Vanderbilt University Department of Economics Working Papers 05010, Vanderbilt University Department of Economics.
  8. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, vol. 69(6), pages 1555-1596, November.
  9. Seo, Myung Hwan, 2008. "Unit Root Test In A Threshold Autoregression: Asymptotic Theory And Residual-Based Block Bootstrap," Econometric Theory, Cambridge University Press, vol. 24(06), pages 1699-1716, December.
  10. Lothian, James R., 1990. "A century plus of Yen exchange rate behavior," Japan and the World Economy, Elsevier, vol. 2(1), pages 47-70, March.
  11. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  12. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
  13. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
  14. Cheung, Yin-Wong & Lai, Kon S., 1998. "Parity reversion in real exchange rates during the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 597-614, August.
  15. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  16. Papell, David H & Theodoridis, Hristos, 2001. "The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 790-803, August.
  17. Kim, Yoonbai, 1990. "Purchasing Power Parity in the Long Run: A Cointegration Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 491-503, November.
  18. Koedijk, Kees G. & Schotman, Peter C. & Van Dijk, Mathijs A., 1998. "The re-emergence of PPP in the 1990s," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 51-61, February.
  19. Georgios Chortareas & George Kapetanios, 2004. "The Yen Real Exchange Rate may be Stationary after all: Evidence from Non-linear Unit-root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(1), pages 113-131, 02.
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