Real Exchange Rate Dynamics Under The Current Float: A Re–Examination

Michael Bleaney · Stephen J. Leybourne

16 citations0/0 files storedManchester School

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Abstract

Augmented Dickey–Fuller regressions on pooled (but not individual) real exchange rates for the post–1973 period consistently reject the unit root null, even after accounting for cross–sectional dependence. The inference that the series is stationary, however, is not necessarily correct, because these tests strongly over–reject the null in certain circumstances, particularly when the series has a stochastic unit root. We find that bilateral real exchange rates against the US dollar have a stochastic unit root. Out–of–sample prediction exercises for an autoregressive model confirm these findings.

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References

1983Empirical exchange rate models of the seventies 1998The overvaluation of purchasing power parity 1996Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries 1990Purchasing Power Parity in the Long Run 1997Searching for stationarity: Purchasing power parity under the current float 1996Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test 2001Nominal exchange rates and monetary fundamentals 1995Banking on currency forecasts: How predictable is change in money?

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2007Subsampling hypothesis tests for nonstationary panels with applications to exchange rates and stock prices 2009Asymptotic theory for explosive random coefficient autoregressive models and inconsistency of a unit root test against a stochastic unit root process 2009Testing for coefficient stability of AR(1) model when the null is an integrated or a stationary process

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