Revisiting the persistence of real exchange rates

Show-Lin Chen and Jyh-Lin Wu

Journal of International Money and Finance, 2020, vol. 103, issue C

Abstract: In this paper we provide new and robust evidence that panel regressions significantly reduce the estimated half-lives of real exchange rates in a sample of 21 countries. These results are obtained under dynamic panel models that control for non-purchasing power parity (PPP) equilibria. Small-sample bias does not have a significant impact on half-lives, since the increase in the half-life arising from the bias is more than compensated by the decrease of the half-life due to the control of non-PPP equilibria. Among the two sources of non-PPP equilibria, i.e., first, the Balassa-Samuelson effect and second, smooth shifts in mean, we find that, under a heterogeneous panel model, the first source results in a larger reduction of half-lives.

Keywords: Real exchange rates; Non-PPP equilibria; Small sample bias; Cross-correlated disturbances; Half-lives (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:103:y:2020:i:c:s0261560618305710

DOI: 10.1016/j.jimonfin.2019.102133

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