Revista Internacional de Economia e Ciências de Gestão

NONLINEARITY AND FRACTIONAL COINTEGRATION ANALYSIS OF THE REAL EXCHANGE RATE: EVIDENCE FROM EUROZONE, CANADA, UNITED KINGDOM AND JAPAN

Abstract

Nadhem Selmi and Nejib Hachicha

The application of fractional cointegration technique is very important in resolving the Rogoff?s (1996) puzzle of purchasing power parity (PPP). By allowing deviations from equilibrium to follow a fractionally integrated process, the fractional cointegration analysis can explain the persistence of a wider range of mean-reversion behaviour better than the standard cointegration analyses. Our empirical results which based on monthly data from January 1990 to September 2008 period illustrate that the PPP reversion exists and can be characterized by a fractionally integrated process in three out of four moneys. Using these results, we can analyze the modified GPH estimator, which has obviously lower bias. The econometric results obtained from the GPH tests hold PPP as a long-run occurrence, though significant short-run deviations from PPP can exist. Therefore, the fractional cointegration analysis permits the deviations from the equilibrium to follow a fractionally integrated process and hence captures a much wider group of research of parity or mean-reversion behavior.