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Purchasing power parity in the long run and structural breaks: evidence from real sterling exchange rates

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  • Andrew Parkes
  • Andreas Savvides

Abstract

The paper contributes to the growing evidence in favour of mean reversion in real exchange rates of industrial countries. The sequential regression model is used to search for endogenous structural breaks in long-term annual sterling exchange rates for the G-7. Any structural breaks thus detected are introduced into a system of univariate autoregressions of the real exchange rate estimated jointly via restricted GLS. Multivariate unit root tests reject the null hypothesis decisively. Our evidence, however, shows that reversion of long-term sterling exchange rates is towards a mean that (for some exchange rates) experiences a structural shift at an endogenously determined date.

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  • Andrew Parkes & Andreas Savvides, 1999. "Purchasing power parity in the long run and structural breaks: evidence from real sterling exchange rates," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 117-127.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:2:p:117-127
    DOI: 10.1080/096031099332384
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    References listed on IDEAS

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    1. Alan M. Taylor, 1996. "International Capital Mobility in History: Purchasing-Power Parity in the Long Run," NBER Working Papers 5742, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Clements, Kenneth W. & Lan, Yihui, 2010. "A new approach to forecasting exchange rates," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1424-1437, November.
    2. Yihui Lan, 2003. "The Long-Term Behaviour of Exchange Rates, Part V: The Stationarity of Exchange Rates," Economics Discussion / Working Papers 03-09, The University of Western Australia, Department of Economics.
    3. Yihui Lan, 2001. "The Explosion of Purchasing Power Parity," Economics Discussion / Working Papers 01-22, The University of Western Australia, Department of Economics.
    4. Daiki Maki, 2006. "Variance ratio tests for a unit root in the presence of a mean shift: small sample properties and an application to purchasing power parity," Applied Financial Economics, Taylor & Francis Journals, vol. 16(8), pages 607-615.
    5. Mariam Camarero & Juan Carlos Cuestas & Javier Ordonez, 2008. "Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 30-46.
    6. Tsangyao Chang & Ding Li & Yang-Cheng Lu & Chia-Hao Lee, 2011. "Purchasing power parity for East-Asia countries: further evidence based on panel stationary test with multiple structural breaks," Applied Economics, Taylor & Francis Journals, vol. 43(24), pages 3289-3298.
    7. Dimitrios Sideris, 2006. "Purchasing Power Parity in economies in transition: evidence from Central and East European countries," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 135-143.
    8. Yihui Lan, 2001. "The Long-Run Value of Currencies: A Big Mac Perspective," Economics Discussion / Working Papers 01-17, The University of Western Australia, Department of Economics.
    9. Karoglou, Michail & Morley, Bruce, 2012. "Purchasing power parity and structural instability in the US/UK exchange rate," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 958-972.
    10. Yihui Lan, 2003. "The Long-Term Behaviour of Exchange Rates, Part III: The Explosion of Purchasing Power Parity," Economics Discussion / Working Papers 03-07, The University of Western Australia, Department of Economics.

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