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Stationarity of Real Exchange Rates in the ¡°Fragile Five¡±: Analysis with Structural Breaks

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  • A. Oznur Umit

Abstract

In this study the stationarity of monthly real exchange rate data for the ¡°fragile five¡± countries which are among the emerging market economies, is analyzed for the period of 2003:01-2015:10, using traditional unit root tests and unit root tests with structural breaks. According to the results of traditional Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root test results, it has been determined that the real exchange rate series of the fragile five countries had a unit root and therefore the Purchasing Power Parity (PPP) hypothesis does not hold true in these countries. The results of a Zivot-Andrews unit root test, which allows for a single structural break, show that real exchange rate series were stationary for Brazil and India, and hence the PPP hypothesis is valid in these countries. According to the results of a Lee-Strazicich unit root test, which allows for two structural breaks, it has been concluded that the hypothesis is valid only for India. Likewise, using the Carrion-i-Silvestre (CS) unit root test, which allows for five structural breaks in the time series, it has been determined that only South Africa¡¯s and India¡¯s real exchange rate series are not stationary, and therefore the PPP hypothesis is not valid for these countries. In line with the results of the CS unit root test it can be claimed that, due to the fact that South African and Indian central banks are not under the pressure of establishing exchange rate stability, they have the possibility of implementing an independent monetary policy.

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  • A. Oznur Umit, 2016. "Stationarity of Real Exchange Rates in the ¡°Fragile Five¡±: Analysis with Structural Breaks," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(4), pages 254-270, April.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:4:p:254-270
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    More about this item

    Keywords

    Fragile five; purchasing power parity; real exchange rate; structural break; unit root tests;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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