NOMINAL EXCHANGE-RATES AND UNIT ROOTS - A RECONSIDERATION

This paper provides empirical evidence that nominal exchange rates are stationary, and are not random walks. Other studies using classical tests suggest that exchange rates contain unit roots, thereby supporting the random walk hypothesis. The apparently permanent nature of shocks to exchange rates has been interpreted to mean that disequilibrium models such as the Dornbusch overshooting model are not useful in explaining exchange rate behavior. This paper applies a new statistical test for unit roots proposed by Sims and based on Bayesian posterior odds ratios; the results favor exchange rate stationarity for several countries. (JEL F31)