IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Purchasing power parity and the long memory properties of real exchange rates: does one size fit all?

  • Marcel Aloy

    ()

    (DEFI - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II)

  • Mohamed Boutahar

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

  • Karine Gente

    ()

    (DEFI - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II)

  • Anne Peguin-Feissolle

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

This paper examines the time series behavior of monthly bilateral real exchange rates (RER) on a comprehensive sample of 78 industrialized and developing countries, using the U.S. Dollar, the UK Pound and the German Deutsche Mark as numeraires. We suggest a three-step testing procedure based on recently introduced econometric techniques, in order to assess the mean-reverting properties of the RER and to address the question of whether real exchange rates follow a non linear process or a long memory process. The main results are as follows. Firstly, most of the bilateral real exchange rates under study are not mean-reverting. Secondly, the nonlinear ESTAR type adjustment is far from being prominent. Finally, only few bilateral RER exhibit true long memory mean-reverting properties.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://halshs.archives-ouvertes.fr/docs/00/55/91/70/PDF/DTGREQAM2011_04.pdf
Download Restriction: no

Paper provided by HAL in its series Working Papers with number halshs-00559170.

as
in new window

Length:
Date of creation: 25 Jan 2011
Date of revision:
Handle: RePEc:hal:wpaper:halshs-00559170
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00559170/en/
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
  2. Choudhry, Taufiq & McNown, Robert & Wallace, Myles, 1991. "Purchasing Power Parity and the Canadian Float in the 1950s," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 558-63, August.
  3. Joseph G. Haubrich & Andrew W. Lo, 1991. "The sources and nature of long-term memory in the business cycle," Working Paper 9116, Federal Reserve Bank of Cleveland.
  4. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
  5. 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.
  6. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
  7. Shimotsu, Katsumi & Phillips, Peter C.B., 2006. "Local Whittle estimation of fractional integration and some of its variants," Journal of Econometrics, Elsevier, vol. 130(2), pages 209-233, February.
  8. Dufrénot, Gilles & Lardic, Sandrine & Mathieu, Laurent & Mignon, Valérie & Péguin-Feissolle, Anne, 2008. "Explaining the European exchange rates deviations: Long memory or non-linear adjustment?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(3), pages 207-215, July.
  9. Georgios Chortareas & George Kapetanios, 2004. "How Puzzling is the PPP Puzzle? An Alternative Half-Life Measure of Convergence to PPP," Working Papers 522, Queen Mary University of London, School of Economics and Finance.
  10. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
  11. 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.
  12. Kanas, Angelos, 2006. "Purchasing Power Parity and Markov Regime Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1669-1687, September.
  13. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November.
  14. Luis Gil-Alana & Antonio Moreno, 2012. "Fractional integration and structural breaks in U.S. macro dynamics," Empirical Economics, Springer, vol. 43(1), pages 427-446, August.
  15. Bahmani-Oskooee, Mohsen & Hegerty, Scott W. & Kutan, Ali M., 2009. "Is PPP sensitive to time-varying trade weights in constructing real effective exchange rates?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1001-1008, August.
  16. Smith, Aaron, 2005. "Level Shifts and the Illusion of Long Memory in Economic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 321-335, July.
  17. Christopoulos, Dimitris K. & León-Ledesma, Miguel A., 2010. "Smooth breaks and non-linear mean reversion: Post-Bretton Woods real exchange rates," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1076-1093, October.
  18. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  19. Mark Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 1-17.
  20. Charles Engel & James Morley, 2000. "The Adjustment of Prices and the Adjustment of the Exchange Rate," Working Papers 0009, University of Washington, Department of Economics.
  21. Luis A. Gil-Alana & Guglielmo M. Caporale, . "Nonlinearities and fractional integration in the US unemployment rate," Faculty Working Papers 18/06, School of Economics and Business Administration, University of Navarra.
  22. Katsumi Shimotsu, 2006. "Exact Local Whittle Estimation of Fractional Integration with Unknown Mean and Time Trend," Working Papers 1061, Queen's University, Department of Economics.
  23. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  24. Mark J. Holmes, 2002. "Purchasing Power Parity and the Fractional Integration of the Real Exchange Rate: New Evidence for Less Developed Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 27(1), pages 125-135, June.
  25. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-98, March.
  26. Bergman, U. Michael & Hansson, Jesper, 2005. "Real exchange rates and switching regimes," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 121-138, February.
  27. Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-12, January.
  28. G. Dufrenot & L. Mathieu & V. Mignon, & A. Peguin-Feissolle, 2002. "Persistent misalignments of the European exchange rates : some evidence from nonlinear cointegration," THEMA Working Papers 2002-29, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  29. Christopher F. Baum & John T. Barkoulas & Mustafa Caglayan, 1998. "Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current float?," Boston College Working Papers in Economics 380, Boston College Department of Economics.
  30. Pierre Perron & Zhongjun Qu, 2008. "Long-Memory and Level Shifts in the Volatility of Stock Market Return Indices," Boston University - Department of Economics - Working Papers Series wp2008-004, Boston University - Department of Economics.
  31. Gil-Alana, L A & Toro, J, 2002. "Estimation and Testing of ARFIMA Models in the Real Exchange Rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(4), pages 279-92, October.
  32. Lee, D. & Schmidt, P., 1993. "On the Power of the KPSS Test of Stationarity Against Fractionally-Integrated Alternatives," Papers 9111, Michigan State - Econometrics and Economic Theory.
  33. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Helene Rey, 2003. "PPP Strikes Back: Aggregation and the Real Exchange Rate," IEHAS Discussion Papers 0307, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  34. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  35. 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.
  36. Sollis, Robert, 2008. "U.S. dollar real exchange rates: Nonlinearity revisited," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 516-528, June.
  37. J. Cunado & L. A. Gil-Alana & F. Perez de Gracia, 2007. "Testing for stock market bubbles using nonlinear models and fractional integration," Applied Financial Economics, Taylor & Francis Journals, vol. 17(16), pages 1313-1321.
  38. R. Kruse & M. Frömmel & L. Menkhoff & P. Sibbertsen, 2010. "What do we know about real exchange rate nonlinearities?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/667, Ghent University, Faculty of Economics and Business Administration.
  39. Kiliç, Rehim, 2009. "Further on nonlinearity, persistence, and integration properties of real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 207-221, April.
  40. 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.
  41. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  42. El-Gamal, Mahmoud A. & Ryu, Deockhyun, 2006. "Short-memory and the PPP hypothesis," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 361-391, March.
  43. 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.
  44. Cheung, Yin-Wong & Lai, Kon S., 2000. "On the purchasing power parity puzzle," Journal of International Economics, Elsevier, vol. 52(2), pages 321-330, December.
  45. Guglielmo Maria Caporale & Juncal Cunado & Luis A. Gil-Alana, 2007. "Deterministic versus Stochastic Seasonal Fractional Integration and Structural Breaks," CESifo Working Paper Series 1989, CESifo Group Munich.
  46. Gil-Alana, Luis A., 2000. "Mean reversion in the real exchange rates," Economics Letters, Elsevier, vol. 69(3), pages 285-288, December.
  47. Yin-Wong Cheung & Kon S. Lai, 2005. "Nominal Exchange Rate Flexibility and Real Exchange Rate Adjustment: Evidence from Dual Exchange Rates in Developing Countries," CESifo Working Paper Series 1512, CESifo Group Munich.
  48. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
  49. Mario Cerrato & Hyunsok Kim & Ronald Macdonald, 2010. "Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1447-1467, October.
  50. Luis A. Gil-Alana, . "Fractional integration and structural breaks at unknown periods of time," Faculty Working Papers 16/06, School of Economics and Business Administration, University of Navarra.
  51. Jean-Francois Villeneuve & Jagdish Handa, 2006. "Purchasing Power Parity as a long-term memory process: evidence from Canada," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 109-117.
  52. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  53. 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.
  54. Katsumi Shimotsu & Peter C.B. Phillips, 2000. "Local Whittle Estimation in Nonstationary and Unit Root Cases," Cowles Foundation Discussion Papers 1266, Cowles Foundation for Research in Economics, Yale University, revised Sep 2003.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:halshs-00559170. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.