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PPP in OECD countries: An analysis of real exchange rate stationarity, cross-sectional dependency and structural breaks

Abstract
The stationarity of OECD real exchange rates over the period 1972-2008 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: 245-269, 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.
Type
Journal Article
Type of thesis
Series
Citation
Holmes, M. J., Otero, J., & Panagiotidis, T. (2012). PPP in OECD countries: An analysis of real exchange rate stationarity, cross-sectional dependency and structural breaks. Open Economies Review, 23(5), 767-783.
Date
2012
Publisher
Springer-Verlag
Degree
Supervisors
Rights