Purchasing power parity and real effective exchange rates
نویسنده
چکیده
This study re-examines the validity of Purchasing Power Parity (PPP) by focusing on the real effective exchange rates (REERs) for the post-Bretton Woods period, using newly developed unit root tests that account for both nonlinearity and smooth temporary multiple breaks in the data. The tests are applied to the REERs of 23 developed countries and are able to reject the null hypothesis of a unit root in 20 cases. The test results reveal that large swings truly exist in most of the REERs, therefore it is crucial to model these infrequent smooth temporary mean changes in the data in testing the (non)stationarity of the REERs. The study provides stronger support than most of previous studies for that PPP holds in a stricter, multi-country version during the floating exchange rate period for the majority of developed countries. JEL classification: F31; C22
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