An Unbiased Appraisal of Purchasing Power Parity
Univariate studies of the hypothesis of unit roots in real exchange rates have yielded consensus point estimates of the half-life of deviations from purchasing power parity of between three to five years. However, least squares-based estimates of half-lives are biased downward. Accordingly, we follo...
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| Format: | eBook |
| Language: | English |
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Washington, D.C.
International Monetary Fund
2001
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| Series: | IMF Working Papers
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| Online Access: | |
| Collection: | International Monetary Fund - Collection details see MPG.ReNa |
| Summary: | Univariate studies of the hypothesis of unit roots in real exchange rates have yielded consensus point estimates of the half-life of deviations from purchasing power parity of between three to five years. However, least squares-based estimates of half-lives are biased downward. Accordingly, we follow Andrews (1993) and use median-unbiased estimators of the half-life of deviations from parity as a preferred measure of the persistence of real exchange rate shocks. We study this issue using real effective exchange rate (REER) data for 22 industrial countries in the post-Bretton Woods period. Three methods of bias correction are implemented, which yield cross-country averages of half-lives of deviations from parity ranging between 4 to 15 years, with the REER of several countries displaying permanent deviations from parity |
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| Physical Description: | 35 pages |
| ISBN: | 9781451859966 |