New Multi-Country Evidence on Purchasing Power Parity: Multivariate Unit Root Test Results

Econometric Institute Report EI 2000-09/A

33 Pages Posted: 6 Nov 2000

See all articles by Jan J. Groen

Jan J. Groen

Federal Reserve Bank of New York

Abstract

In this paper a likelihood-based multivariate unit root testing framework is utilized to test whether the real exchange rates of G10 countries are non-stationary. The framework uses a likelihood ratio statistic which combines the information across all involved countries while retaining heterogeneous rates of mean reversion. This likelihood ratio statistic has an asymptotic distribution which can be typified as a summation of squared, univariate Dickey and Fuller (1979) distributions. Our multivariate unit root tests indicate that bilateral G10 real exchange rates are stationary, irrespective of the numeraire country. We also analyze per panel the time necessary to have an adjustment to a shock in the individual real exchange rates. From this analysis it becomes apparent that there are significant cross-country differences in the adjustment of individual real exchange rates within each panel.

JEL Classification: C12, C23, F31

Suggested Citation

Groen, Jan J., New Multi-Country Evidence on Purchasing Power Parity: Multivariate Unit Root Test Results. Econometric Institute Report EI 2000-09/A, Available at SSRN: https://ssrn.com/abstract=232534 or http://dx.doi.org/10.2139/ssrn.232534

Jan J. Groen (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/groen/

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