Exchange Rate Dynamics Revisited: A Panel Data Test of the Fractional Integration Order
Author
Summary, in English
We test the possibility that exchange rates from nine developed countries have a unit root against the alternate possibility that they are fractionally integrated. Theoretically, exchange rates are only expected to follow a random walk under restrictive assumptions. However, most traditional unit root tests cannot reject a unit root in exchange rates, and time series tests that allow for fractional integration have given inconclusive results. To increase the power of the test of the integration order we develop two panel data tests of the fractional integration order. Monte Carlo simulations show that these tests are correctly sized and have relatively high power compared to other similar tests. Moreover, our empirical results show that we can reject a unit root in exchange rates with a high probability, but the integration order is close to one. This indicates that exchange rates are mean-reverting, although the reversion is slow, resulting in long swings.
Department/s
Publishing year
2014
Language
English
Pages
389-409
Publication/Series
Empirical Economics
Volume
47
Issue
2
Document type
Journal article
Publisher
Physica Verlag
Topic
- Economics
Keywords
- Nominal exchange rates
- Panel data
- Fractional integration
- Long memory
Status
Published
ISBN/ISSN/Other
- ISSN: 0377-7332