Purchasing Power Parity in the Long Run and Structural Breaks: Evidence from Real Sterling Exchange Rates

This paper contributes to the growing evidence in favor of mean reversion in real exchange rates of industrial countries. We use the sequential regression model to search for endogenous structural breaks in long-term annual sterling exchange rates for the G-7. Any structural breaks, thus detected, are introduced into a system of univariate autoregressions of the real exchange rates is towards a mean that (for some exchange rates) experiences a structural shift at an endogenously determined date.