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Higher Power Tests for Bilateral Failure of PPP after 1973

Listed author(s):
  • Graham Elliott
  • Elena Pesavento

Whilst point estimates for mean reversion in real exchange rates suggest reasonable (but long) half lives to shocks, it still remains uncomfortable that models without any mean reversion at all are often compatible with individual country pair data from the floating period. Studies with data over longer periods find mean reversion, but at the cost of mixing in data from earlier exchange rate arrangements. Pooling the floating period data for a number of countries also finds evidence of mean reversion, but at the expense of potentially mixing in country pairs with and without mean reversion. We examine tests for mean reversion for individual country pairs where greater power against close alternatives is gained through modeling other economic variables with the real exchange rate. Our results are broadly consistent with other methods to improve the power of tests for unit roots in real exchange rates, finding support for the mean reversion hypothesis.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0502.

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Date of creation: Jan 2005
Handle: RePEc:emo:wp2003:0502
Contact details of provider: Web page: http://economics.emory.edu/home/journals/
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  27. repec:cup:etheor:v:11:y:1995:i:5:p:1148-71 is not listed on IDEAS
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