Decomposing the persistence of real exchange rates

Dimitrios Malliaropulos, Ekaterini Panopoulou, Theologos Pantelidis and Nikitas Pittis

Empirical Economics, 2013, vol. 44, issue 3, 1217-1242

Abstract: We propose a new methodology for decomposing the persistence of deviations from purchasing power parity (PPP). By directly comparing the impulse response function (IRF) of a vector autoregressive (VAR) model, where the real exchange rate is Granger caused by a set of candidate variables, with the IRF of the equivalent ARMA model for the real exchange rate, we capture the effects of the Granger-causing variables on the half-life of deviations from PPP. Our empirical results for a set of 20 industrial countries suggest that on average around 50% of the persistence of real exchange rates can be attributed to nominal interest rate differentials, inflation differentials and relative business cycle position with the numenaire country. Finally, we provide confidence intervals for the contributions of the aforementioned variables to the persistence of deviations from PPP by means of Monte Carlo simulations. Copyright Springer-Verlag 2013

Keywords: Real exchange rate; Persistence measures; VAR; Impulse response function; PPP; F31; C32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00181-012-0565-5

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