THE TREND BEHAVIOR OF REAL EXCHANGE-RATES - EVIDENCE FROM OECD COUNTRIES

This paper examines the validity of purchasing power parity (PPP) unde r the current float using real effective exchange rates of eleven OECD countries. The author employs a test which allows for a one-time chan ge in the intercept and/or in the slope of the trend function. The tim ing of the structural break is treated as unknown and is endogenously searched from the data. It is found that for a vast majority of countr ies, the real exchange rate can be characterized as a stationary proce ss with a broken trend. The paper provides support for PPP in the long run.