Purchasing power parity in the long run and structural breaks: evidence from real sterling exchange rates

Andrew L. H. Parkes

18 citations0/0 files storedApplied Financial Economics

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Abstract

The paper contributes to the growing evidence in favour of mean reversion in real exchange rates of industrial countries. The sequential regression model is used to search for endogenous structural breaks in long-term annual sterling exchange rates for the G-7. Any structural breaks thus detected are introduced into a system of univariate autoregressions of the real exchange rate estimated jointly via restricted GLS. Multivariate unit root tests reject the null hypothesis decisively. Our evidence, however, shows that reversion of long-term sterling exchange rates is towards a mean that (for some exchange rates) experiences a structural shift at an endogenously determined date.

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References

1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 2002Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 1996The Purchasing Power Parity Puzzle 1992Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 1995Unit Root Tests in ARMA Models with Data-Dependent Methods for the Selection of the Truncation Lag 1995Unit Root Tests in ARMA Models with Data-Dependent Methods for the Selection of the Truncation Lag 1992Nonstationarity and Level Shifts With an Application to Purchasing Power Parity

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2006Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought 2012Purchasing power parity and structural instability in the US/UK exchange rate 2002The Explosion of Purchasing Power Parity 2006Rational speculative bubbles and duration dependence in exchange rates: an analysis of five currencies 2021Towards resolving the purchasing power parity (PPP) ‘Puzzle’ in newly industrialized countries (NIC’s)

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