Does the Australian dollar real exchange rate display mean reversion

Abstract

This paper examines the post Bretton Woods experience of the Australian dollar. In this period Australia moved from a managed to a freely floating exchange rate environment. Parametric and non-parametric techniques are applied to data from a trade weighted index to analyse the time series properties of Australia's real exchange rate. Even allowing for structural breaks there is no evidence of the long run equilibrium relation between the exchange rate and relative prices predicted by the purchasing power parity hypothesis. © 2002 Elsevier Science Ltd. All rights reserved.