PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-sectional Dependency and Structural Breaks

Mark Holmes (), Jesus Otero and Theodore Panagiotidis

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: The stationarity of OECD real exchange rates over the period 1972-2008 is tested using a panel of twenty six member countries. The methodology followed stems from the need to meet several key concerns: (i) the identification of which panel members are stationary; (ii) the presence of cross-sectional dependence among the countries in the panel; and (iii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ a recent test that examines the time series properties of the data within a panel framework, namely the Hadri and Rao (2008) panel stationarity test. The real exchange rates of the twenty six OECD countries are found to be stationary when considered as a panel, but only after allowing for endogenously-determined structural breaks and cross section dependence. We also find that once these structural breaks are removed from the underlying series, the half-life of shocks to the real exchange rate is much shorter than has been calculated in earlier studies.

Keywords: Heterogeneous dynamic panels; purchasing power parity; mean reversion; panel stationarity test. (search for similar items in EconPapers)
JEL-codes: F31 F33 G15 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-12
New Economics Papers: this item is included in nep-cba and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-Sectional Dependency and Structural Breaks (2012)
Working Paper: PPP in OECD countries: An analysis of real exchange rate stationarity, cross-sectional dependency and strucutral breaks (2011)
Working Paper: PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, cross-Sectional Dependency and Structural Breaks (2011)
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