Deconstructing shocks and persistence in OECD real exchange rates1)

Basher Syed Abul and Carrion-i-Silvestre Josep Lluís ()
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Basher Syed Abul: Department of Research and Monetary Policy, Qatar Central Bank, PO Box 1234, Doha, Qatar
Carrion-i-Silvestre Josep Lluís: AQR-IREA Research Group, Department of Econometrics, Statistics and Spanish Economy, University of Barcelona, Av, Diagonal, 690, 08034 Barcelona

The B.E. Journal of Macroeconomics, 2013, vol. 13, issue 1, 187-212

Abstract: We study the Purchasing Power Parity (PPP) hypothesis and the PPP puzzle for a sample of seventeen OECD economies when real exchange rates (RERs) are subject to multiple structural breaks. Applying recent panel econometric methods, we first show that RERs are found to be I(1) non-stationary processes when the analysis neglects structural breaks, while they are characterized as I(0) stationary stochastic processes when structural breaks are accommodated. This indicates that ignoring structural breaks can lead to model misspecification, which can bias (upward) shocks’ persistence measures. After controlling for structural breaks, our half-life point estimates appear below one year for both idiosyncratic and common measures of persistence of deviation from the changing mean.

Keywords: cross-sectional dependence, multiple structural breaks, panel data stationarity tests, shock persistence, JEL Classification: C32; C33; E31 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejmac:v:13:y:2013:i:1:p:187-212:n:1008

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DOI: 10.1515/bejm-2012-0060

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