Economics at your fingertips  

Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries

Mohsen Bahmani-Oskooee (), Ali Kutan () and Su Zhou ()
Additional contact information
Su Zhou: Department of Economics, University of Texas at San Antonio, San Antonio, TX 78249-0633, USA

Southern Economic Journal, 2008, vol. 74, issue 4, 1049-1062

Abstract: In an effort to fight relatively high inflation, many developing countries try to manage their nominal exchange rates through official intervention. In addition, developing countries tend to have high transportation costs, tariffs, and nontariff barriers. These factors are among the sources of generating nonlinearity in real exchange rates and hence some nonlinear adjustment toward purchasing power parity (PPP) in developing countries. In this paper, we employ monthly real effective exchange rate (REER) data of 88 developing countries and test the null of nonstationarity versus an alternative of linear stationarity by the means of a conventional unit root test and compare the results with those obtained from a new test in which the null is the same but the alternative hypothesis is nonlinear stationarity. The latter test supports the PPP theory in more developing countries compared with the former test, suggesting that nonlinear adjustment toward PPP in developing countries is an important phenomenon. Reported country characterizations indicate that reversion in REER occurs more often for high-inflation countries and for countries with high flexibility in their exchange rates.

JEL-codes: F31 (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (32) Track citations by RSS feed

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Southern Economic Journal is currently edited by Laura Razzolini

More articles in Southern Economic Journal from Southern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Laura Razzolini (). This e-mail address is bad, please contact .

Page updated 2019-06-05
Handle: RePEc:sej:ancoec:v:74:4:y:2008:p:1049-1062