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Efficient Unit Root Tests of real Exchange Rates in the Post-Bretton Woods Era

  • Francis W. Ahking

    (University of Connecticut)

We apply the efficient unit-roots tests of Elliott, Rothenberg, and Stock (1996), and Elliott (1998) to twenty-one real exchange rates using monthly data of the G-7 countries from the post-Bretton Woods floating exchange rate period. Our results indicate that, for eighteen out of the twenty-one real exchange rates, the null hypothesis of a unit root can be rejected at the 10% significance level or better using the Elliot et al (1996) DF-GLS test. The unit-root null hypothesis is also rejected for one additional real exchange rate when we allow for one endogenously determined break in the time series of the real exchange rate as in Perron (1997). In all, we find favorable evidence to support long-run purchasing power parity in nineteen out of twenty-one real exchange rates. Second, we find no strong evidence to suggest that the use of non-U.S. dollar-based real exchange rates tend to produce more favorable result for long-run PPP than the use of U.S. dollar-based real exchange rates as Lothian (1998) has concluded.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2002-17.

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Length: 19 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:uct:uconnp:2002-17
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  3. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  4. Engel, C. & Kim, C.J., 1996. "The Long-Run U.S./U.K. real Exchange Rate," Discussion Papers in Economics at the University of Washington 96-14, Department of Economics at the University of Washington.
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