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Is There a Base Currency Effect in Long-Run PPP?

Jerry Coakley and Ana-Maria Fuertes ()

International Journal of Finance & Economics, 2000, vol. 5, issue 4, 253-63

Abstract: The base currency effect in the purchasing power parity (PPP) literature refers to the stylized fact that tests on German mark real exchange rates are more likely to support mean reversion than analogous tests on US dollar rates. Using a panel of 19 OECD currencies, 1973-97, we employ different panel unit root approaches to investigate the view that this effect can be attributed to neglected cross-sectional dependence. While the results from panel methods which permit cross-sectional dependence and heterogeneous serial correlation generally support long-run PPP, they provide no evidence of a base currency effect. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

Date: 2000
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International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

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