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Are Real Exchange Rates Mean Reverting in Developing Economies in Asia? A Covariate Stationarity Approach

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  • Ching-Chuan Tsong

Abstract

Previous studies on the stationarity properties of the real exchange rates in developing countries in Asia have generally produced mixed results. The unit root behavior is puzzling because it contradicts the purchasing power parity (PPP) hypothesis. This study examines international data on 15 developing countries by employing the covariate stationarity test proposed by Jansson (2004). The covariates used are motivated by economic theory, including inflation, money supply, income and current account. Our results show strong evidence in support of the hypothesis. On the contrary, the unit root test with the alternative hypothesis of nonlinear mean reversion provides inadequate evidence in favor of PPP.

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  • Ching-Chuan Tsong, 2010. "Are Real Exchange Rates Mean Reverting in Developing Economies in Asia? A Covariate Stationarity Approach," International Economic Journal, Taylor & Francis Journals, vol. 24(3), pages 397-412.
    • Handle: RePEc:taf:intecj:v:24:y:2010:i:3:p:397-412
    DOI: 10.1080/10168737.2010.504778
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