Purchasing power parity and the long memory properties of real exchange rates: does one size fit all?

Marcel Aloy (1) , Mohamed Boutahar (2) , Karine Gente (1) , Anne Peguin-Feissolle (2)

1 DEFI - Centre de recherche en développement économique et finance internationale
2 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

This paper examines the time series behavior of monthly bilateral real exchange rates (RER) on a comprehensive sample of 78 industrialized and developing countries, using the U.S. Dollar, the UK Pound and the German Deutsche Mark as numeraires. We suggest a three-step testing procedure based on recently introduced econometric techniques, in order to assess the mean-reverting properties of the RER and to address the question of whether real exchange rates follow a non linear process or a long memory process. The main results are as follows. Firstly, most of the bilateral real exchange rates under study are not mean-reverting. Secondly, the nonlinear ESTAR type adjustment is far from being prominent. Finally, only few bilateral RER exhibit true long memory mean-reverting properties.

Mots clés: Fractional Integration; Nonlinear modelling; Mean reverting process; Long-memory process

Domaines: Economies et finances

Marcel Aloy, Mohamed Boutahar, Karine Gente, Anne Peguin-Feissolle. Purchasing power parity and the long memory properties of real exchange rates: does one size fit all?. 2011. ⟨halshs-00559170⟩