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The Yen Real Exchange Rate May Not Be Stationary After All: New Evidence from Non-linear Unit-Root Tests

Hyeongwoo Kim () and Young-Kyu Moh

No auwp2012-02, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: Researchers have encountered difficulties in finding empirical evidence of Purchasing Power Parity (PPP) especially when conventional linear unit root tests are employed for the Japanese yen real exchange rate. Chortareas and Kapetanios (2004), however, report strong evidence in favor of a Balassa-Samuelson type model of PPP by applying a nonlinear unit root test by Kapetanios et al. (2003) for the other G7 and Asian currencies relative to the Japanese yen, claiming that the yen real exchange rate may be (trend) stationary. We question the validity of this remark. First, we note that their claim is upset when we extend the data until 2008 even when the same nonlinear unit root test is used. Second, we apply the inf-t test by Park and Shintani (2005, 2010) which does not require the Taylor approximation, and find strong evidence against nonstationarity for most yen real exchange rates. Our results also corroborate the findings of Kim and Moh (2010) who report a possibility of misspecification problems with the use of Taylor-approximation based tests.

Keywords: Purchasing Power Parity; Transition Autoregressive Process; Nonlinear Adjustments; inf-t Unit Root Test (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-mon
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