Are Asian-Pacific real exchange rates (trend) stationary?

Abstract

We apply the Range Unit-Root (RUR) test, a new nonparametric test advanced by Aparicio et al. (2006), to the exploration of stationarity for 19 Asian-Pacific currencies. The RUR test is exceptionally well suited to this analysis because it is robust against multiple structural breaks, parameter shifts and certain additive outliers, does not depend on the variance of any stationary alternative and thereby outperforms standard tests in terms of power on near-unit-root stationary time series. We find strikingly favourable results for trend-stationarity for most of the 19 Asian-Pacific currencies studied. Our results indicate that the long-run equilibrium Real Exchange Rate (RER) varies with changes in some real economic factors, hinting at some type of Balassa–Samuelson effects, which is particularly plausible for export-led, fast-growing economies such as many of the Asian-Pacific countries included in this study.

Keywords:

• real exchange rates
• trend-stationarity
• RUR
• FB-RUR

JEL Classification:

• F31
• G15

Notes

¹An increasing number of recent studies have found favourable results for stationarity of Real Exchange Rate (RER) using linear models (Amara and Papell, 2006; Elliott and Pesavento, 2006).

²Start dates for our data vary as follows: Producer Price Index (PPI)-based RER for Australia, India, Indonesia, Japan, Korea, New Zealand, Pakistan and Thailand start in 1973Q1; Hong Kong and the Philippines, 1993Q1; Malaysia, 1984Q1; Singapore, 1974Q1; and Sri Lanka, 1976Q1. Consumer Price Index (CPI)-based RER for Australia, Fiji, India, Indonesia, Japan, Korea, Malaysia, Myanmar, Nepal, New Zealand, Pakistan, the Philippines, Samoa, Singapore, Sri Lanka and Thailand start in 1973Q1; Bangladesh, 1993Q3; Hong Kong, 1980Q4; and Vietnam, 1995Q1.

³Plotting the Hodrick–Prescott (HP)-detrended bilateral RER data demonstrated that none of the initial conditions deviated substantially from the underlying trend of the series.