Asymmetric nonlinear mean reversion in real effective exchange rates: A Fisher-type panel unit root test applied to Sub-Saharan Africa

This study investigates the nonlinear data generating processes of real effective exchange rates in a panel of Sub-Saharan African countries; the region with the highest transportation costs, trade barriers in international arbitrage and frequent central bank intervention in the foreign exchange market, which are plausible main sources of nonlinear and asymmetric deviations from purchasing power parity. By means of Monte Carlo simulations, we use the empirical distributions of the exponential smooth transition autoregressive (ESTAR), and the asymmetric ESTAR data generating processes to test for mean reversion in monthly real effective exchange rates. We then apply Fisher's inverse chi-square test that combines the observed significance levels of independent univariate unit root tests to test for panel unit roots. The findings suggest that once nonlinearities and asymmetries are taken into account, there is more evidence in favor of the purchasing power parity hypothesis.