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Real exchange rates may have nonlinear trends
Author(s) -
Cushman David O.
Publication year - 2008
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.322
Subject(s) - purchasing power parity , econometrics , unit root , economics , nonlinear system , null hypothesis , exchange rate , statistics , mathematics , macroeconomics , physics , quantum mechanics
The unit root null is tested against possible nonlinear‐trend stationarity for 13 US and German bilateral real exchange rates over the floating exchange rate period. Eight tests specified with nonlinear trends are applied. Simulations are used to determine individual and joint significance levels and to help interpret the results. Unit roots can be rejected for a number of the exchange rates, and nonlinear‐trend stationarity appears more plausible than mean or linear‐trend stationarity as the alternative. In several cases, estimates of the trends support the nonlinear‐trend conclusion with statistical and economic significance. Thus, purchasing power parity is probably violated, but real exchange rates have meaningful long‐run equilibrium values. Copyright © 2007 John Wiley & Sons, Ltd.