Purchasing power parity and real effective exchange rates

Su Zhou ()
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Su Zhou: UTSA

Working Papers from College of Business, University of Texas at San Antonio

Abstract: This study re-examines the validity of Purchasing Power Parity (PPP) by focusing on the real effective exchange rates (REERs) for the post-Bretton Woods period, using newly developed unit root tests that account for both nonlinearity and smooth temporary multiple breaks in the data. The tests are applied to the REERs of 23 developed countries and are able to reject the null hypothesis of a unit root in 20 cases. The test results reveal that large swings truly exist in most of the REERs, therefore it is crucial to model these infrequent smooth temporary mean changes in the data in testing the (non)stationarity of the REERs. The study provides stronger support than most of previous studies for that PPP holds in a stricter, multi-country version during the floating exchange rate period for the majority of developed countries.

Keywords: PPP; Real effective exchange rates; Nonlinear stationarity; Smooth structural breaks (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:tsa:wpaper:0158eco

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