The Yen Real Exchange Rate May Be Stationary After All: Evidence from Nonlinear Unit-Root Tests

Bank of England Working Paper No. 311

U of London Queen Mary Economics Working Paper No. 484

23 Pages Posted: 3 Apr 2003

See all articles by Georgios E. Chortareas

Georgios E. Chortareas

University of Athens - Faculty of Economics; University of Essex - Department of Accounting, Finance & Management; King's College London

George Kapetanios

King's College, London

Date Written: October 2006

Abstract

The empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The behaviour of the yen real exchange rate has most stubbornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non-linear version of the Augmented Dickey-Fuller test, based on an exponentially smooth-transition autoregressive model (ESTAR) that enhances the power of the tests against mean-reverting non-linear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post-Bretton Woods era. Thus, the real yen behaviour may not be so different after all but simply perceived to be so due to the use of a restrictive alternative hypothesis in previous tests.

Keywords: PPP, yen, real exchange rates, nonlinear models, ESTAR models

JEL Classification: C23, F31

Suggested Citation

Chortareas, Georgios and Kapetanios, George, The Yen Real Exchange Rate May Be Stationary After All: Evidence from Nonlinear Unit-Root Tests (October 2006). Bank of England Working Paper No. 311; U of London Queen Mary Economics Working Paper No. 484. Available at SSRN: https://ssrn.com/abstract=370080 or http://dx.doi.org/10.2139/ssrn.370080

Georgios Chortareas

University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
+(30) 210 3689805 (Phone)
+(30) 210 3689810 (Fax)

University of Essex - Department of Accounting, Finance & Management ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

George Kapetanios (Contact Author)

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

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