Real exchange rates may have nonlinear trends

David Cushman

International Journal of Finance & Economics, 2008, vol. 13, issue 2, 158-173

Abstract: The unit root null is tested against possible nonlinear-trend stationarity for 13 US and German bilateral real exchange rates over the floating exchange rate period. Eight tests specified with nonlinear trends are applied. Simulations are used to determine individual and joint significance levels and to help interpret the results. Unit roots can be rejected for a number of the exchange rates, and nonlinear-trend stationarity appears more plausible than mean or linear-trend stationarity as the alternative. In several cases, estimates of the trends support the nonlinear-trend conclusion with statistical and economic significance. Thus, purchasing power parity is probably violated, but real exchange rates have meaningful long-run equilibrium values. Copyright © 2007 John Wiley & Sons, Ltd.

Date: 2008
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DOI: 10.1002/ijfe.322

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