Stationarity of South Asian Real Exchange Rates Under Exponential Star (ESTAR) Framework

Abstract

This paper investigates stationarity of four South Asian real exchange rates. In addition to the unit root tests that assume linearity in real exchange rate series, we apply tests to check stationarity that assume nonlinearity in a particular time series. Results from linear unit root tests (e.g. ADF and KPSS) unequivocally indicate that selected South Asian real exchange rates are all nonstationary. Different versions of a nonlinear unit root test, namely, the KSS tests, can only partially overturn these results. Overall, the real exchange rates of India, Pakistan and Sri Lanka seem to be conclusively nonstationary, while tests produce mixed results for Bangladesh. The findings have implications, among other, that PPP does not seem to characterize long run most real exchange rate movements in South Asia.