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

Holmes, Mark and Otero, Jesus and Panagiotidis, Theodore (2012) PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-Sectional Dependency and Structural Breaks. Open Economies Review, 23 (5). pp. 767-783.

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Abstract

The stationarity of OECD real exchange rates over the period 1972\x962008 is tested using a panel of 26 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 (Oxford Bulletin of Economics and Statistics 70: 245\x96269, 2008 ) panel stationarity test. The real exchange rates of the 26 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. Copyright Springer Science+Business Media, LLC 2012

Item Type: Article
Uncontrolled Keywords: Heterogeneous dynamic panels; Purchasing power parity; Mean reversion; Panel stationarity test; F31; F33; G15
Depositing User: Admin Admin
Date Deposited: 13 Oct 2015 17:54
Last Modified: 13 Oct 2015 17:54
URI: http://eprints.lib.uom.gr/id/eprint/494

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