Purchasing Power Parity and Structural Breaks: The Group of Seven Postwar Experience

This paper contributes to the growing evidence in favor of mean reversion in real exchange rates of industrial countries. Recent favorable evidence has been based mostly on long-term low-frequency (annual) or panel data. We use the sequential regression model to search for endogenous structural breaks with monthly post-war real exchange rates for the Group of Seven. Significant structural breaks, thus detected, are introduced into a system of univariate autoregressions estimated jointly via restricted EGLS. Multivariate tests of the unit root hypothesis reject the null decisively in favor of reversion to a mean that is not always a constant but (for some exchange rates) experiences a structural shift.