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A Bayesian Analysis Of The Unit Root In Real Exchange Rates

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  • Schotman P.
  • van Dijk, H. 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.

Suggested Citation

  • Schotman P. & van Dijk, H. K., 1989. "A Bayesian Analysis Of The Unit Root In Real Exchange Rates," Econometric Institute Archives 272390, Erasmus University Rotterdam.
    • Handle: RePEc:ags:eureia:272390
    DOI: 10.22004/ag.econ.272390
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    References listed on IDEAS

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    1. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
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    4. Huizinga, John, 1987. "An empirical investigation of the long-run behavior of real exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 149-214, January.
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    10. repec:bla:jfinan:v:43:y:1988:i:4:p:933-48 is not listed on IDEAS
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