The behavior of real exchange rate: Nonlinearity and breaks

We analyze the possibility of nonlinear adjustment and unknown smooth breaks in the stationarity of real exchange rates in the Group of 20 (G-20) countries over a period from January 1994 to April 2010 by applying the Panel SURADF test with Fourier function. Although most of the results from a univariate unit root test and panel unit root test indicated a fail to reject the unit root null hypothesis in the real exchange rates of G-20, the results of the Panel SURADF test with Fourier function show a strong rejection of non-stationarity of real exchange rates among the G-20 and imply that PPP is valid for all in the G-20. The evidence also implies that there are nonlinearity and smooth breaks in real exchange rates of G-20 countries.

► We analyze the nonlinear adjustment and unknown smooth breaks of real exchange rates. ► We use the Panel SURADF test with Fourier function to test the exchange rates of G-20. ► The results show a strong rejection of non-stationarity of real exchange rates of G-20. ► There are nonlinearity and smooth breaks in real exchange rates of G-20.