Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment

Hyeongwoo Kim (gmmkim@gmail.com) and Young-Kyu Moh

No auwp2010-08, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: This paper revisits the empirical evidence of purchasing power parity under the current float by recursive mean adjustment (RMA) proposed by So and Shin (1999). We first report superior power of the RMA-based unit root test in finite samples relative to the conventional augmented Dickey-Fuller (ADF) test via Monte Carlo experiments for 16 linear and nonlinear autoregressive data generating processes. We find that the more powerful RMA-based unit root test rejects the null hypothesis of a unit root for 16 out of 20 current float real exchange rates relative to the US dollar, while the ADF test rejects only 5 at the 10% significance level. We also find that the computationally simple RMA-based asymptotic confidence interval can provide useful information regarding the half-life of the real exchange rate.

Keywords: Recursive Mean Adjustment; Finite Sample Performance; Purchasing Power Parity; Half-Life (search for similar items in EconPapers)
JEL-codes: C12 C22 F31 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-ecm and nep-opm
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Examining the evidence of purchasing power parity by recursive mean adjustment (2012)
Working Paper: Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment (2010)
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