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Long memory or structural breaks: can either explain nonstationary real exchange rates under the current float?

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Baum, Christopher F.
Barkoulas, John T.

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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.

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Elsevier

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Economics

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Journal of International Financial Markets, Institutions and Money

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10.1016/S1042-4431(99)00018-9

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