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Temporal aggregation and purchasing power parity persistence

Yamin S Ahmad and William D. Craighead

Journal of International Money and Finance, 2011, vol. 30, issue 5, pages 817-830

Abstract: This paper uses a unique new monthly US-UK real exchange rate series for the January 1794-December 2009 period to reexamine the academic debate over purchasing power parity (PPP). The consensus view described by Rogoff (1996) is that PPP holds in the long-run, but short-run deviations are very persistent, with half-lives ranging from 3 to 5 years. Most of the literature using long time series relies on the annual data developed by Lee (1976) and Lothian and Taylor (1996), which were both constructed from underlying higher-frequency data sources. Estimates of purchasing power parity persistence using these series may therefore be subject to temporal aggregation bias. We find evidence of aggregation bias which indicates the half-life of PPP deviations has been overestimated in much of the previous literature. We also find that estimates of the half-lives are further reduced once we account for the Harrod (1933)-Balassa (1964)-Samuelson (1964) effect. The result of aggregation bias appears to be robust even when considering the case that real exchange rates exhibit nonlinear dynamics.

Keywords: F31; C22; Temporal; aggregation; Real; exchange; rates; Purchasing; power; parity; Exchange; rate; persistence; Half-lives (search for similar items in EconPapers)
Date: 2011
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Working Paper: Temporal Aggregation and Purchasing Power Parity Persistence (2011) Downloads
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:5:p:817-830

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