Temporal Aggregation and Purchasing Power Parity Persistence

Yamin S Ahmad and William D. Craighead

Working Papers from UW-Whitewater, Department of Economics

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 3-5 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 under temporal aggregation 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: Temporal Aggregation; Real Exchange Rates; Purchasing Power Parity; Exchange Rate Persistence; Half-Lives (search for similar items in EconPapers)
JEL-codes: F30 (search for similar items in EconPapers)
Date: 2010-01, Revised 2011-02
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Published in Journal of International Money and Finance, 30 (5), September 2011, pp. 817 - 830

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Related works:
Journal Article: Temporal aggregation and purchasing power parity persistence (2011)
Working Paper: Temporal Aggregation and Purchasing Power Parity Persistence (2011)
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