The Yen Real Exchange Rate May Not be Stationary After All: New Evidence from Non-linear Unit-Root Tests
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Researchers have encountered difficulties in finding empirical evidence of Purchasing Power Parity (PPP) especially when conventional linear unit root tests are employed for the Japanese yen real exchange rate. Chortareas and Kapetanios (2004), however, report strong evidence in favor of a Balassa-Samuelson type model of PPP by applying a nonlinear unit root test by Kapetanios et al. (2003) to the other G7 and Asian currencies relative to the Japanese yen, claiming that the yen real exchange rate may be (trend) stationary. We question the validity of this remark. First, we note that their claim is upset when we extend the data until 2008 even when the same nonlinear unit root test is used. Second, we apply the inf- test by Park and Shintani (2005, 2010) which does not require the Taylor approximation, and find strong evidence against stationarity for most yen real exchange rates. Our results also corroborate the findings of Kim and Moh (2010) who report a possibility of misspecification problems by using Taylor-approximation based tests.
Abstract
Researchers have encountered difficulties in finding empirical evidence of Purchasing Power Parity (PPP) especially when conventional linear unit root tests are employed for the Japanese yen real exchange rate. Chortareas and Kapetanios (2004), however, report strong evidence in favor of a Balassa-Samuelson type model of PPP by applying a nonlinear unit root test by Kapetanios et al. (2003) to the other G7 and Asian currencies relative to the Japanese yen, claiming that the yen real exchange rate may be (trend) stationary. We question the validity of this remark. First, we note that their claim is upset when we extend the data until 2008 even when the same nonlinear unit root test is used. Second, we apply the inf- test by Park and Shintani (2005, 2010) which does not require the Taylor approximation, and find strong evidence against stationarity for most yen real exchange rates. Our results also corroborate the findings of Kim and Moh (2010) who report a possibility of misspecification problems by using Taylor-approximation based tests.
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