The Behaviour of Real Exchange Rates During the Post-Bretton Woods Period

Lucio Sarno and Mark Taylor

No 1730, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Tests for long-run purchasing power parity (PPP) may lack power with sample periods corresponding to the span of the recent float, leading researchers to use more powerful multivariate unit root tests. We point out a potential problem with such tests: joint non-stationarity of real exchange rates may be rejected when only one of them is stationary. We suggest another test where the null hypothesis is violated only when all of the processes are stationary. This test is easily constructed and has a known limiting distribution. We investigate the finite-sample empirical performance of both tests using Monte Carlo techniques. Applying the tests to four major real exchange rates over the recent floating rate period, we find strong evidence of long-run PPP.

Keywords: Monte Carlo simulation; multivariate unit root test; Purchasing Power Parity; Real Exchange Rate; test power (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 1997-11
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Citations: View citations in EconPapers (29)

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Journal Article: The behavior of real exchange rates during the post-Bretton Woods period (1998)
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