Are Real Exchange Rates Stationary? More Evidence from Panel Unit Root Tests

Description

A number of recent studies using the panel unit root test of Levin and Lin (1992) suggest that real exchange rates are mean-reverting. These findings are at odds with traditional univariate unit root/stationarity test results. The purpose of this note is to extend the analysis to indexes of real effective exchange rates, and to demonstrate the sensitivity of the results to the lag lengths adopted in the panel testing procedure and the variables included in the panel. The empirical findings suggest the evidence in favour of a Cassellian view of purchasing power parity is less conclusive than it may appear.