Purchasing power parity and the Taylor rule

Masao Ogaki, Bruce E. Hansen, Ippei Fujiwara and Hyeongwoo Kim ()

AJRC Working Papers from Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University

Abstract: It is well-known that there is a large degree of uncertainty around Rogoff's (1996) consensus half-life of the real exchange rate. To obtain a more efficient estimator, we develop a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. Further, we propose a median unbiased estimator for the system method based on the generalized method of moments with nonparametric grid bootstrap confidence intervals. Applying the method to real exchange rates of 18 developed countries against the US dollar, we find that most half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals. Our Monte Carlo simulation results are consistent with an interpretation of these results that the true half-lives are short but long half-life estimates from single equation methods are caused by the high degree of uncertainty of these methods.

JEL-codes: C32 E52 F31 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Related works:
Journal Article: Purchasing Power Parity and the Taylor Rule (2015)
Working Paper: Purchasing Power Parity and the Taylor Rule (2013)
Working Paper: Purchasing Power Parity and the Taylor Rule (2011)
Working Paper: Purchasing Power Parity and the Taylor Rule (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:csg:ajrcwp:1305

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