Random Walks in the Real Exchange Rates of 20 OECD Countries: Recent Evidence from the Panel Integration and Cointegration Tests

Hassan Shirvani, Natalya (Natasha) Delcoure


We study the real exchange rates of 20 OECD countries over the 1970-2020 period. The panel unit root tests developed by Im, Pesaran, and Shin (2003) and Pesaran (2007) reveal no evidence of unit roots.  However, allowing for the presence of cross-sectional dependence, we find significant evidence of unit roots. We also attempt to explain the deviation of the real exchange rates from their PPP levels by testing for the presence of cointegration between these variables and some of their potential determinants, such as differences in national productivities and the price of oil, again drawing on more powerful panel cointegration tests of Larsson, Lyhagen and Löthgren (2001). Our findings strongly support the presence of cointegration for all the countries in the sample, thus providing additional evidence for the existence of higher real exchange rates in the countries with higher productivities.  Hence, our findings also necessitate the adoption of more coordinated economic policies within the OECD to avoid the balance of international crises that periodically afflict the member countries.

Keywords: exchange rate, cointegration, purchasing power parity.

JEL Classification: D51

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