IMF Working Papers

Estimation of the Near Unit Root Model of Real Exchange Rates

By C. John McDermott

May 1, 1996

Preview Citation

Format: Chicago

C. John McDermott Estimation of the Near Unit Root Model of Real Exchange Rates, (USA: International Monetary Fund, 1996) accessed November 21, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The time-series properties of real exchange rates, on a number of definitions, for 22 industrial countries during 1979-95 were used to re-examine whether PPP holds. It is shown that if real exchange rates reverted to a constant mean slowly, say by five percent a month, then at standard levels of significance we should expect 11 of the 22 series examined to yield evidence of mean reversion and to reject that hypothesis of a unit root. Using models that imply a constant unconditional mean or trend-stationary productivity changes, we find that only one of the 22 real exchange rates shows evidence against unit roots. This low rate of rejection of unit roots in real exchange rates can be construed as evidence against PPP.

Subject: Exchange rates, Foreign exchange, Labor, Labor costs, Purchasing power parity, Real effective exchange rates, Real exchange rates

Keywords: Confidence interval, Estimator density, Exchange rates, Interval estimator, Labor costs, Phillips-perron estimator, Purchasing power parity, Real effective exchange rates, Real exchange rates, Unbiased estimator, Unit root model, WP

Publication Details

  • Pages:

    32

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1996/050

  • Stock No:

    WPIEA0501996

  • ISBN:

    9781451846928

  • ISSN:

    1018-5941

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