An Unbiased Appraisal of Purchasing Power Parity

Christopher McDermott and Paul Cashin ()

No 2001/196, IMF Working Papers from International Monetary Fund

Abstract: 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 of between three to five years. However, least squares-based estimates of half-lives are biased downward. Accordingly, we follow Andrews (1993) and use median-unbiased estimators of the half-life of deviations from parity as a preferred measure of the persistence of real exchange rate shocks. We study this issue using real effective exchange rate (REER) data for 22 industrial countries in the post-Bretton Woods period. Three methods of bias correction are implemented, which yield cross-country averages of half-lives of deviations from parity ranging between 4 to 15 years, with the REER of several countries displaying permanent deviations from parity.

Keywords: WP; least squares; null hypothesis; time series; Median-unbiased estimation; purchasing power parity; shock persistence; LS estimate; least squares estimator; Phillips-perron estimate; interval estimate; point estimate; estimation procedure; least squares estimates of the Augmented Dickey-Fuller; confidence interval from zero; LS counterpart; interval estimation; unit root model; Real exchange rates; Real effective exchange rates; Exchange rates; Exchange rate modelling (search for similar items in EconPapers)
Pages: 35
Date: 2001-12-01
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Citations: View citations in EconPapers (10)

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Journal Article: An Unbiased Appraisal of Purchasing Power Parity (2003)
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