The yen real exchange rate may be stationary after all: evidence from non-linear unit root tests

Georgios Chortareas and George Kapetanios

Bank of England working papers from Bank of England

Abstract: The empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The behaviour of the yen real exchange rate has most stubbornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non-linear version of the Augmented Dickey-Fuller test, based on an exponentially smooth-transition autoregressive model (ESTAR) that enhances the power of the tests against mean-reverting non-linear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post-Bretton Woods era. Thus, the real yen behaviour may not be so different after all but simply perceived to be so due to the use of a restrictive alternative hypothesis in previous tests.

Date: 2006-10
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets, nep-ifn and nep-sea
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The Yen Real Exchange Rate may be Stationary after all: Evidence from Non‐linear Unit‐root Tests (2004)
Working Paper: The Yen Real Exchange Rate May Be Stationary after All: Evidence from Nonlinear Unit-Root Tests (2003)
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