Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current oat?
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چکیده
Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current oat? Christopher F. Baum Boston College Chestnut Hill, MA 02467 USA John T. Barkoulas Louisiana Tech University Ruston, LA 71272 USA Mustafa Caglayan Koç University Istanbul, Turkey This paper considers two potential rationales for the apparent absence of mean reversion in real exchange rates in the post-Bretton Woods era. We allow for (i) fractional integration and (ii) a double mean shift in the real exchange rate process. These methods, applied to CPI-based rates for 17 countries and WPI-based rates for 12 countries, demonstrate that the unit-root hypothesis is robust against both fractional alternatives and structural breaks. This evidence suggests rejection of the doctrine of absolute long-run purchasing power parity during the post-Bretton Woods era. JEL: F31, C22.
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