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Deconstructing Shocks and Persistence in OECD Real Exchange Rates

  • Syed A. Basher

    ()

    (Department of Economic Policies, Qatar Central Bank, Doha, Qatar.)

  • Josep Lluis Carrión-i-Silvestre

    ()

    (AQR-IREA, University of Barcelona.)

This paper analyzes the persistence of shocks that affect the real exchange rates for a panel of seventeen OECD developed countries during the post-Bretton Woods era. The adoption of a panel data framework allows us to distinguish two different sources of shocks, i.e. the idiosyncratic and the common shocks, each of which may have di¤erent persistence patterns on the real exchange rates. We first investigate the stochastic properties of the panel data set using panel stationarity tests that simultaneously consider both the presence of cross-section dependence and multiple structural breaks that have not received much attention in previous persistence analyses. Empirical results indicate that real exchange rates are non-stationary when the analysis does not account for structural breaks, although thisconclusion is reversed when they are modeled. Consequently, misspecification errors due to the non-consideration of structural breaks leads to upward biased shocks' persistence measures. The persistence measures for the idiosyncratic and common shocks have been estimated in this paper always turn out to be less than one year.

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File URL: http://www.xreap.cat/RePEc/xrp/pdf/XREAP2008-06.pdf
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File URL: http://www.xreap.cat/RePEc/xrp/pdf/XREAP2008-06.pdf
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Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2008-06.

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Length: 35 pages
Date of creation: Jun 2008
Date of revision: Jun 2008
Handle: RePEc:xrp:wpaper:xreap2008-06
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