A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries

Jeffrey Frankel and Andrew Rose

No 233411, Center for International and Development Economics Research (CIDER) Working Papers from University of California-Berkeley, Department of Economics

Abstract: Previous time-series studies have shown evidence of mean-reversion in real exchange rates. Deviations from purchasing power parity (PPP) appear to have half-lives of approximately four years. However, the long samples required for statistical significance are unavailable for most currencies, and are potentially inappropriate because of regime changes. In this study, we re-examine deviations from PPP using a panel of 150 countries and 45 annual post WWII observations. Our panel shows strong evidence of mean-reversion that is similar to that from long time-series. PPP deviations are eroded at a rate of approximately 15 percent annually, i.e., their half-life is around four years. Such findings can be masked in timeseries data, but are relatively easy to find in cross-sections.

Keywords: Financial Economics; International Relations/Trade (search for similar items in EconPapers)
Pages: 29
Date: 1995-06
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Citations: View citations in EconPapers (70)

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https://ageconsearch.umn.edu/record/233411/files/cal-cider-c095-052.pdf (application/pdf)

Related works:
Journal Article: A panel project on purchasing power parity: Mean reversion within and between countries (1996)
Working Paper: A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries (1995)
Working Paper: A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries (1995)
Working Paper: A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ucbewp:233411

DOI: 10.22004/ag.econ.233411

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