Department of Economics Working Paper Series Non-Parametric Tests of Real Exchange rates in the Post-Bretton Woods

This paper examines the mean-reverting property of real exchange rates. Ear-lier studies have generally not been able to reject the null hypothesis of a unit-root in real exchange rates, especially for the post-Bretton Woods floating period. The results imply that long-run purchasing power parity does not hold. More recent studies, especially those using panel unit-root tests, have found more favorable results, however. But, Karlsson and Löthgren (2000) and others have recently pointed out several potential pitfalls of panel unit-root tests. Thus, the panel unit-root test results are suggestive, but they are far from conclusive. Moreover, con-sistent individual country time series evidence that supports long-run purchasing power parity continues to be scarce. In this paper, we test for long memory using Lo’s (1991) modified rescaled range test, and the rescaled variance test of Gi-raitis, Kokoszka, Leipus, and Teyssière (2003). Our testing procedure provides a non-parametric alternative to the parametric tests commonly used in this litera-ture. Our data set consists of monthly observations from April 1973 to April 200