Estimation of the Near Unit Root Model of Real Exchange Rates

Christopher McDermott

No 1996/050, IMF Working Papers from International Monetary Fund

Abstract: The time-series properties of real exchange rates, on a number of definitions, for 22 industrial countries during 1979-95 were used to re-examine whether PPP holds. It is shown that if real exchange rates reverted to a constant mean slowly, say by five percent a month, then at standard levels of significance we should expect 11 of the 22 series examined to yield evidence of mean reversion and to reject that hypothesis of a unit root. Using models that imply a constant unconditional mean or trend-stationary productivity changes, we find that only one of the 22 real exchange rates shows evidence against unit roots. This low rate of rejection of unit roots in real exchange rates can be construed as evidence against PPP.

Keywords: WP; confidence interval; unit root model; unbiased estimator; estimator density; interval estimator; Phillips-perron estimator; Real exchange rates; Real effective exchange rates; Exchange rates; Purchasing power parity; Labor costs (search for similar items in EconPapers)
Pages: 32
Date: 1996-05-01
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