Long-run dynamics of exchange rates: A multi-frequency investigation

Long Vo and Duc Hong Vo

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: The empirical observation that purchasing power parity (PPP) holds in the long run but not in the short run has enjoyed a near-consensus status in international finance literature. However, a similar degree of agreement has not been reached with respect to the exact horizon of this “long run” aspect. To shed light on this matter, a novel approach is adopted in this paper to combine conventional time series methodology with insights from multi-frequency analyses. In particular, we simultaneously explore price-exchange-rate dynamics not only through time, but also at various horizons via a wavelet decomposition. Unit root tests applied to wavelet-based decomposed real exchange rates indicates that PPP holds at horizons consistent with the literature. With respect to the predictive value of our approach, we show that our decomposed measures provide guidance to future movements of real change rates. Additionally, we find that nominal exchange-rate dynamics are dominated by activities corresponding to low frequencies. Results from this study thus enable researchers and practitioners to establish an exchange-rate modelling framework with increased efficiency.

Keywords: Purchasing power parity; Wavelets; Multi-frequency analysis (search for similar items in EconPapers)
JEL-codes: C58 F31 F39 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Long-run dynamics of exchange rates: A multi-frequency investigation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940819303080

DOI: 10.1016/j.najef.2019.101125

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