New Multi-Country Evidence on Purchasing Power Parity: Multi-Variate Unit Root Test Results
In this paper a likelihood-based multi-variate unit root testing framework is utilized to test whether the real exchange rates of G10 countries are non-stationary. The framework uses a likelihood ratio statistic which combines the information across all involved countries while retaining heterogeneous rates of mean reversion. This likelihood ratio statistic has an asymptotic distribution which can be typified as a summation of squared, univariate Dickey and Fuller (1979) distributions. Our multi-variate unit root tests indicate that bilateral G10 real exchange rates are stationary, irrespective of the numeraire country. On the other hand, the choice of the numeraire country seems to be of importance for the issue whether mean reversion rates across G10 real exchange rates are heterogeneous or homogeneous.
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