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

Author

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  • Michael Bleaney
  • Stephen J. Leybourne
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.

Suggested Citation

  • Michael Bleaney & Stephen J. Leybourne, 2003. "Real Exchange Rate Dynamics Under The Current Float: A Re–Examination," Manchester School, University of Manchester, vol. 71(2), pages 156-171, March.
    • Handle: RePEc:bla:manchs:v:71:y:2003:i:2:p:156-171
    DOI: 10.1111/1467-9957.00341
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    Cited by:

    1. Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2013. "Equilibrium exchange rate determination and multiple structural changes," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 52-66.
    2. Daisuke Nagakura, 2009. "Inconsistency of a Unit Root Test against Stochastic Unit Root Processes," IMES Discussion Paper Series 09-E-23, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Nagakura, Daisuke, 2009. "Asymptotic theory for explosive random coefficient autoregressive models and inconsistency of a unit root test against a stochastic unit root process," Statistics & Probability Letters, Elsevier, vol. 79(24), pages 2476-2483, December.
    4. Ziesemer, Thomas, 2005. "How to cure the trade balance? Reducing budget deficits versus devaluations in the presence of J- and W-curves for Brazil," Research Memorandum 018, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    5. Ivan Paya & David Peel, 2005. "The process followed by PPP data. On the properties of linearity tests," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2515-2522.
    6. Yoon, Gawon, 2004. "On the existence of expected utility with CRRA under STUR," Economics Letters, Elsevier, vol. 83(2), pages 219-224, May.
    7. Gawon Yoon, 2010. "Nonlinear mean-reversion to purchasing power parity: exponential smooth transition autoregressive models and stochastic unit root processes," Applied Economics, Taylor & Francis Journals, vol. 42(4), pages 489-496.
    8. Daisuke Nagakura, 2007. "Testing for Coefficient Stability of AR(1) Model When the Null is an Integrated or a Stationary Process," IMES Discussion Paper Series 07-E-20, Institute for Monetary and Economic Studies, Bank of Japan.

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