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PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, cross-Sectional Dependency and Structural Breaks

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  • Mark J. Holmes

    (Department of Economics, Waikato University, New Zealand)

  • Jesús Otero

    (Facultad de Economía, Universidad del Rosario, Colombia)

  • Theodore Panagiotidis

    (Department of Economics, University of Macedonia, Greece)

Abstract

The stationarity of OECD real exchange rates over the period 1972-2008 is tested using a panel of twenty six member countries. The methodology followed stems from the need to meet several key concerns: (i) the identification of which panel members are stationary; (ii) the presence of cross-sectional dependence among the countries in the panel; and (iii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ a recent test that examines the time series properties of the data within a panel framework, namely the Hadri and Rao (2008) panel stationarity test. The real exchange rates of the twenty six OECD countries are found to be stationary when considered as a panel, but only after allowing for endogenously-determined structural breaks and cross section dependence. We also find that once these structural breaks are removed from the underlying series, the half-life of shocks to the real exchange rate is much shorter than has been calculated in earlier studies.

Suggested Citation

  • Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2011. "PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, cross-Sectional Dependency and Structural Breaks," Working Paper series 51_11, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:51_11
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    More about this item

    Keywords

    Heterogeneous dynamic panels; purchasing power parity; mean reversion; panel stationarity test;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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