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An Empirical Analysis of Nonstationarity in Panels of Exchange Rates and Interest Rates with Factors

Hyungsik Moon () and Benoit Perron ()

No 05.35, IEPR Working Papers from Institute of Economic Policy Research (IEPR)

Abstract: This paper studies nonstationarities in panels of exchange rates and interest rates. For this, we survey developments in the analysis of nonstationary panels with cross-sectional dependence modeled as a factor model. We focus on panel unit root tests and on inference on the nonstationary factors. Our results suggest that PPP does not hold for our panel of 17 exchange rates due to the presence of nonstationary factors. The dominant factor has a very strong European flavor. Moreover, we find a single nonstationary factor in a panel of Canadian and U.S. interest rates of different maturities and risk. Since some of the idiosyncratic components are stationary, these series are cointegrated. The dominant factor has a level interpretation as in the term structure literature.

Pages: 33 pages
Date: 2005-08
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