An Unbiased Appraisal of Purchasing Power Parity
Paul Cashin () and
Christopher McDermott ()
IMF Staff Papers, 2003, vol. 50, issue 3, 1
Univariate studies of the hypothesis of unit roots in real exchange rates have yielded consensus point estimates of the half-life of deviations from purchasing power parity (PPP) of between three to five years (Rogoff, 1996). However, conventional least-squares-based estimates of half-lives are biased downward. Accordingly, as a preferred measure of the persistence of real exchange rate shocks we use median-unbiased estimators of the half-life of deviations from parity, which correct for the downward bias of conventional estimators. We study this issue using real effective exchange rate (REER) data for 20 industrial countries in the post-Bretton Woods period. The serial correlation-robust median-unbiased estimator yields a cross-country average of half-lives of deviations from parity of about eight years, with the REER of several countries displaying permanent deviations from parity. However, using the median-unbiased estimator that is robust to the moving average and heteroskedastic errors present in real exchange rate data reduces the estimated half-life of parity deviations. Using this unbiased estimator, we find that the majority of countries have finite point estimates of half-lives of parity deviation, which is supportive of PPP holding in the post-Bretton Woods period. We also find that the average bias-corrected half-life of parity deviations is about five years, which is consistent with (but at the upper end of) Rogoff's (1996) consensus estimate of the half-life of deviations from parity. Copyright 2003, International Monetary Fund
JEL-codes: C22 F31 (search for similar items in EconPapers)
References: Add references at CitEc
Citations: View citations in EconPapers (17) Track citations by RSS feed
Downloads: (external link)
http://www.imf.org/External/Pubs/FT/staffp/2003/03/pdf/cashin.pdf main text (application/pdf)
Access to full text is restricted to subscribers.
Working Paper: An Unbiased Appraisal of Purchasing Power Parity (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pal:imfstp:v:50:y:2003:i:3:p:1
Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/41308/PS2
Access Statistics for this article
More articles in IMF Staff Papers from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla ().