 Adjusting toward long-run purchasing power parityJournal of International Money and Finance, 2024, vol. 149, issue C Abstract: Under purchasing power parity (PPP) exchange rates and relative prices adjust to maintain a constant real exchange rate in the long run. Its empirical validity continues to be questioned. We use data on exchange rates and prices relative to the U.S. for a long-span (1870–2020) panel of 16 countries to examine (a) whether the long-run elasticity is one; (b) whether there is adjustment by exchange rates or prices to maintain a constant real exchange rate and (c) the time taken to adjust. We use four estimators, which increasingly restrict the model. These are country-specific vector error correction model in exchange rates and relative prices; the Johansen estimator, which has the cross-equation restriction that the long-run coefficient in the two equations is the same; the system pooled mean group estimator, which has a homogeneous long-run coefficient over countries and heterogeneous short-run dynamics, and a univariate real exchange rate equation used to obtain median unbiased estimates of the half-life. Keywords: Purchasing power parity; Exchange rates; Relative prices; Adjustment; Heterogeneous panels; Long-span data; Cross-section dependence (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:149:y:2024:i:c:s0261560624001918 DOI: 10.1016/j.jimonfin.2024.103204 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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