Purchasing Power Parity Adjustment Speeds in High Frequency Data when the Equilibrium Real Exchange Rate is Proxied by a Deterministic Trend

Ivan Paya () and David Peel

Manchester School, 2003, vol. 71, issue s1, 39-53

Abstract: Rogoff suggested in 1996 that the dollar–yen real exchange rate represented a ‘canonical’ case of a trend in the equilibrium real exchange rate. The implied speed of adjustment of the dollar–yen real exchange rate is found to be substantially faster, with half‐life shocks of less than 2 years, from estimates of a non‐linear model which incorporates a deterministic trend proxying the equilibrium level. We also examine the power of unit root tests against smooth transition non‐linear models which incorporate a deterministic trend and the robustness of such non‐linear estimations using Monte Carlo and bootstrap simulations.

Date: 2003
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https://doi.org/10.1111/1467-9957.71.s.3

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