An Unbiased Appraisal of Purchasing Power Parity

December 1, 2001

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Format: Chicago

C. John McDermott, and Paul Cashin. An Unbiased Appraisal of Purchasing Power Parity, (USA: International Monetary Fund, 2001) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Exchange rate modelling, Exchange rates, Foreign exchange, Purchasing power parity, Real effective exchange rates, Real exchange rates

Keywords: Confidence interval from zero, Estimation procedure, Exchange rate modelling, Exchange rates, Interval estimate, Interval estimation, Least squares, Least squares estimates of the Augmented Dickey-Fuller, Least squares estimator, LS counterpart, LS estimate, Median-unbiased estimation, Null hypothesis, Phillips-perron estimate, Point estimate, Purchasing power parity, Real effective exchange rates, Real exchange rates, Shock persistence, Time series, Unit root model, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/196
Stock No:

WPIEA1962001
ISBN:

9781451859966
ISSN:

1018-5941

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