Mean Reversion Properties in Real Effective Exchange Rates

In recent years, advances in the field of unit root tests helped topartially solve the first purchasing power parity puzzle. Non-linearmean-reversion tests with real exchange rates were able to reject thenull of a unit root (indicating mean reversion) in significantly morecases than the standard linear tests. These papers suffer from twoproblems: small samples and sensitivity of numeraire currency. Thisstudy investigates the mean reversion property of real effective exchangerates, which are robust to the choice of numeraire. In a largesample of 96 countries, we show that mean reversion is present inapproximately 60 % of all countries depending on the underlying timeseriesmodel