ON UNIT ROOTS AND REAL EXCHANGE-RATES - EMPIRICAL-EVIDENCE AND MONTE-CARLO ANALYSIS

This paper presents some empirical evidence that real exchange rate series contain a unit root in their time series representation, which cancels out on first differencing, using the augmented Dickey-Fuller test. The power of this test is also tested using Monte Carlo methods and it is found to be quite powerful against a range of stationary local alternatives. The findings imply the absence of any tendency of the nominal exchange rate to converge on purchasing power parity, even in the long run. © 1990, Taylor & Francis Group, LLC. All rights reserved.