IMF Working Papers

IMF Working Papers
Journal
Publisher:
International Monetary Fund
ISSN:
1018-5941
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
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Estimation of the Near Unit Root Model of Real Exchange Rates

Estimation of the Near Unit Root Model of Real Exchange Rates
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Journal Issue
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Volume/Issue:
1996/50
Series:
IMF Working Papers
Author(s):
C. McDermott
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
May 1996
DOI:
http://dx.doi.org/10.5089/9781451846928.001
ISBN:
9781451846928
ISSN:
1018-5941
Page:
32
The time-series properties of real exchange rates, on a number of definitions, for 22 industrial countries during 1979-95 were used to re-examine whether PPP holds. It is shown that if real exchange rates reverted to a constant mean slowly, say by five percent a month, then at standard levels of significance we should expect 11 of the 22 series examined to yield evidence of mean reversion and to reject that hypothesis of a unit root. Using models that imply a constant unconditional mean or trend-stationary productivity changes, we find that only one of the 22 real exchange rates shows evidence against unit roots. This low rate of rejection of unit roots in real exchange rates can be construed as evidence against PPP.
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