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

Abstract


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


Full Text:

PDF

References


Adler, M. and B. Lehmann. 1983. “Deviations from Purchasing Power Parity in the Long Run.” Journal of Finance, 38:1471-1487.

Akaike, H. 1973. “Information Theory and an Extension of the Maximum Likelihood Principle.” Second International Symposium on Information Theory: Akademiai Kiado: 267-281.

Bai, J. and Ng, S. 2003. “Determining the Number of Factors in Approximate Factor Models.” Econometrica 70:191-221.

Balassa, B. 1964. “The Purchasing Power Parity Doctrine: A Reappraisal.” Journal of Political Economy 72: 584-596.

Balke, N.S. and T.B. Fomby. 1997. “Threshold Autoregression.” International Economic Review 38: 627-645.

Baum C., J. Barkoulas, and M. Caglayan. 1999. “Long Memory of Structural Breaks: Can Either Explain Nonstationary Real Exchange Rates under the Current Float? Journal of International Financial Markets, Institutions, and Money9 (4), 359-376.

Breitung, J. 2005. “A Parametric Approach to the Estimation of Cointegration Vectors in Panel Data.” Econometric Reviews: 151-173.

Breusch, T.S. and Pagan, A. 1980. “Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics.”Review of Economic Studies47: 139-153.

Cheung, Y.-W. and K. S. Lai. 2000. “On the Purchasing Power Parity Puzzle.” Journal of International Economics52: 321-330.

Choi, I. 2001. “Unit Root Tests for Panel Data.” Journal of International Money and Banking20 (2): 249-272.

Dickey, D. A. and W. A. Fuller. 1979. “Distribution of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association 74: 427-431.

Enders, W. and C.W. Granger. 1998. “Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates.” Journal of Business and Economic Statistics 16: 304-311.

Engel, K.S. 2000. “One-Parameter Semigroups for Linear Evolution Equations,” Springer.

Fama, E. 1991. “Efficient Markets II.” Journal of Finance 46: 1575-1617.

Flores, R., P. Jorion, P.-Y. Preumont, and A. Szafarz .1999. “Multivariate Unit Root Tests of the PPP Hypothesis.” Journal of Empirical Finance 6 (4): 335-353.

Frankel, J.A. and A.K. Rose. 1996. “A Panel Project on Purchasing Power Parity: Mean Reversion within and Between Countries.” Journal of International Economics 40: 209-224.

Fraser, P., M. P. Taylor, and A. Webster. 1991. “An Empirical Examination of Long-Run Purchasing Power Parity as Theory of International Commodity Arbitrage.” Applied Economics 23 (11): 1749-1759.

Hsiao, C. 2007. “Panel Data Analysis: Advantages and Challenges.” Invited Paper, Sociedad de Estadística e Investigación Operativa, 1-22.

Im, K., Pesaran, H, and Shin, K. 2003. “Testing for Unit Roots in Heterogeneous Panels.” Journal of Econometrics 115: 53-74.

Johansen, S. 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models." Econometrica, 59 (6): 1551-1580.

Kapetanios, G.,Y. Shin, and S. Snell. 2002. “Testing for a Unit Root in the Nonlinear STAR Framework,” Journal of Econometrics 112(2): 359-379.

Kugler, P. and C. Lenz. 1993. “Multivariate Cointegration Analysis and the Long-Run Validity of PPP.” Review of Economics and Statistics 75 (1): 180-184.

Kydland F.E. and E.C. Prescott. 1982. “Time to Build and Aggregate Fluctuations,” Econometrica 50: 1345-1370.

Larsson, R., Lyhagen, J. and M. Löthgren. 2001. “Likelihood-based cointegration tests in heterogeneous panels.” The Econometrics Journal 4: 109-142.

Levin, A., Lin, F. 1992. “Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties.” Unpublished Manuscript, University of California at San Diego, Discussion Paper No. 92-93 (revised 1993).

Li, D, J. Qian, and L. Su. 2016. “Panel Data Models with Interactive Fixed Effects and Multiple Structural Breaks,” Journal of the American Statistical Association, 111 (516), 1804-1819.

Lothian, J. and M.P. Taylor. 1996. “Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries.” Journal of Political Economy 104 (3): 488-509.

Maddala, G.S. 1998. “Recent Developments in Dynamic Econometric Modelling: A Personal Viewpoint,” Political Analysis.

Maddala, G.S. and Wu, S. 1999. “A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test.” Oxford Bulletin of Economics and Statistics 61: 631-652.

Mark, N. 1990. “Real and Nominal Exchange Rates in the Long Run: An Empirical Investigation.” Journal of International Economics 28: 115-136.

MacDonald, R. 1996. “Panel Unit Root Tests and Real Exchange Rates.” Economics Letters 50 (1): 7-11.

Moon, H. R. and B. Perron. 2004 “Testing for a Unit Root in Panels with Dynamic Factors. “Journal of Econometrics 122: 81-126.

O’Connell, P.G. 1998. “The Overvaluation of Purchasing Power Parity.” Journal of International Economics 44: 1-19.

Oh, K.Y.1996. “Purchasing Power Parity and Unit Root Tests Using Panel Data” Journal of International Money and Finance15: 405-418.

Perron, P. 1989. “The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis" Econometrica 57: 1361-1401.

Pesaran, H. 2004. “General Diagnostic Tests for Cross Section Dependence in Panels.” Cambridge Working Papers in Economics No 435.

Pesaran, H. 2007. “A Simple Panel Unit Root Test in the Presence of Cross Section Dependence.” Journal of Applied Econometrics, 22: 265–312.

Phillips, P. and Sul, D. 2003. “Dynamic Panel Estimation and Homogeneity Testing under Cross Section Dependence.” Econometric Journal 6: 217-259.

Quah, D. 1994. “Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data.”Economic Letters 44: 9-19.

Reinsel, G. and Ahn, S. 1992. “Vector Autoregressive Models with Unit Roots and Reduced Rank Structures: Estimation, Likelihood Ratio Test, and Forecasting.” Journal of Time Series Analysis 13: 353-357.

Rogoff, K. 1996. “Monetary Models of Dollar/Yen/Euro Nominal Exchange Rates: Dead or Undead?” Economic Journal 109 (459): 655-659.

Roll, R. 1979. “Violations of Purchasing Power Parity and their Implications for Efficient International Commodity Markets.” in Marshall Sarnat and Giorgio Szego, eds. International Finance and Trade, (Ballinger, Cambridge, MA).

Samuelason, P. 1964. “Theoretical Notes on Trade Problems.” Review of Economics and Statistics 46: 145-154.

Sarno, L. and M. P. Taylor. 2002. “Purchasing Power Parity and the Real Exchange Rate.” International Monetary Fund Papers, 49: 65-105.

Schotman, P.C. and H.K.van Dijk. 1991. “A Baysian Analysis the Unit Root in Real Exchange Rates.” Journal of Econometrics 49: 195-238.

Taylor, M. P. 1988. “An Empirical Examination of Long-Run Purchasing Power Parity Using Cointegration Techniques.” Applied Economics 20: 1369-1381.

Taylor, M. P. and P. McMahon. 1988. “Long-Run Purchasing Power Parity Using Cointegration Techniques.” Applied Economics 20: 1369-1381.

Taylor, A.M. 2002. “A Century of Purchasing Power Parity.” Review of Economics and Statistics 84 (1): 139-150.

Taylor, M.P. 2006. “Real Exchange Rates and Purchasing Power Parity: Mean-Reversion in Economic Thought.” Applied Financial Economics 16 (1/2): 1-17.

Zivot E. and D.W. Andrews. 1992. “Further Evidence on the Great Crash, the Oil Price shock, and Unit Root Hypothesis.” Journal of Business and Economic Statistics 10: 251-270.


Refbacks

  • There are currently no refbacks.


International Journal of Business and Economics is licensed under a Creative Commons Attribution 4.0 International License Based on a work at http://ijbe.ielas.org

Copyright © 2016-2022 International Journal of Business and Economics (IJBE)

ISSN (online) 2545-4137

Disclaimer: Articles on International Journal of Business and Economics (IJBE) have been previewed and authenticated by the Authors before sending for the publication. The Journal, Chief Editor and the editorial board are not entitled or liable to either justify or responsible for inaccurate and misleading data if any. It is the sole responsibility of the Author concerned.