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The yen real exchange rate may be stationary after all: evidence from non-linear unit root tests
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The yen real exchange rate may be stationary after all: evidence from non-linear unit root tests

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  • Georgios Chortareas
  • George Kapetanios

Abstract

The empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The behaviour of the yen real exchange rate has most stubbornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non-linear version of the Augmented Dickey-Fuller test, based on an exponentially smooth-transition autoregressive model (ESTAR) that enhances the power of the tests against mean-reverting non-linear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post-Bretton Woods era. Thus, the real yen behaviour may not be so different after all but simply perceived to be so due to the use of a restrictive alternative hypothesis in previous tests.

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  • Georgios Chortareas & George Kapetanios, 2006. "The yen real exchange rate may be stationary after all: evidence from non-linear unit root tests," Bank of England working papers 311, Bank of England.
    • Handle: RePEc:boe:boeewp:311
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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