Modeling nominal exchange rates in Uganda. A comparison between traditional unit root tests and fractional integration

Abstract

This paper analyzes six major nominal exchange rates in Uganda, determining whether shocks in each series are transitory or permanent in the long run. We obtain results from traditional unit root tests and compare these to the results from newer fractional integration techniques that have been shown to have higher power in establishing stationarity or mean-reversion. The results show evidence of mean reversion in the cases of Euro and Kenya shilling, but not for the US dollar, Japanese Yen, the Pound and the Canadian dollar. This means that the shocks affecting the latter currencies do not dissipate in the long run.