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

Serie

  • Koç University-TUSIAD Economic Research Forum Working Papers

Resumen

  • 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.

fecha de publicación

  • 2011-12

Líneas de investigación

  • Heterogeneous Dynamic Panels
  • Mean Reversion
  • Panel Stationarity test
  • Purchasing Power Parity

Issue

  • 1135