Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle

Claude Lopez, C J. Murray and David Papell

Working papers from Banque de France

Abstract: Using median-unbiased estimation based on Augmented-Dickey-Fuller (ADF) regressions, recent research has questioned the validity of Rogoff's "remarkable consensus" of 3-5 year half-lives of deviations from PPP. The confidence intervals of these half-life estimates, however, are extremely wide, with lower bounds of about one year and upper bounds of infinity. We extend median-unbiased estimation to the DF-GLS regression of Elliott, Rothenberg, and Stock (1996). We find that combining median-unbiased estimation with this regression has the potential to tighten confidence intervals for the half-lives. Using long horizon real exchange rate data, we find that the typical lower bound of the confidence intervals for median-unbiased half-lives is just under 3 years. Thus, while previous confidence intervals for median-unbiased half-lives are consistent with virtually anything, our tighter confidence intervals are inconsistent with economic models with nominal rigidities as candidates for explaining the observed behavior of real exchange rates and move us away from solving the PPP puzzle.

Keywords: PPP puzzle; median-unbiased; persistence. (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2011
New Economics Papers: this item is included in nep-ets and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Median-unbiased estimation in DF-GLS regressions and the PPP puzzle (2013)
Working Paper: Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle (2011)
Working Paper: Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle (2009)
Working Paper: Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle (2008)
Working Paper: Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle (2003)
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