Economics Department
Working Papers in Economics
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TITLE:
Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current float?
AUTHOR(S):
Christopher F. Baum, Boston College
John T. Barkoulas, Boston College
Mustafa Caglayan, Boston College
DOCUMENT TYPE: Article
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ABSTRACT:
This paper considers two potential rationales for the apparent absence of mean reversion in real exchange rates in the post-Bretton Woods era. We allow for (i) fractional integration and (ii) a double mean shift in the real exchange rate process. These methods, applied to CPI-based rates for 17 countries and WPI-based rates for 12 countries, demonstrate that the unit-root hypothesis is robust against both fractional alternatives and structural breaks. This evidence suggests rejection of the doctrine of absolute long-run purchasing power parity during the post-Bretton Woods era.
Publication Status: published, Journal of International Financial Markets, Institutions, and Money, 1999, 9, 359-376.