Arbeitspapier
Getting PPP right: Identifying mean-reverting real exchange rates in panels
Recent advances in testing for the validity of Purchasing Power Parity (PPP) focus on the time series properties of real exchange rates in panel frameworks. One weakness of such tests, however, is that they fail to inform the researcher as to which cross-section units are stationary. As a consequence, a reservation for PPP analyses based on such tests is that a small number of real exchange rates in a given panel may drive the results. In this paper we examine the PPP hypothesis focusing on the stationarity of the real exchange rates in up to 25 OECD countries. We introduce a methodology that when applied to a set of established panel-unit-root tests, allows the identification of the real exchange rates that are stationary. We apply procedures that account for cross-sectional dependence. Our results reveal evidence of mean-reversion that is significantly stronger as compared to that obtained by the existing literature, strengthening the case for PPP. Moreover, our approach can be used to provide half-lives estimates for the mean-reverting real exchange rates. We find that the half-lives are shorter than the literature consensus and therefore that the PPP puzzle is less pronounced than initially thought.
- Language
-
Englisch
- Bibliographic citation
-
Series: Working Paper ; No. 629
- Classification
-
Wirtschaft
Hypothesis Testing: General
Statistical Simulation Methods: General
Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
Foreign Exchange
- Subject
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PPP
panel unit root tests
real exchange rates
half-lives
PPP puzzle
Kaufkraftparität
Unit Root Test
Panel
Schätzung
OECD-Staaten
- Event
-
Geistige Schöpfung
- (who)
-
Chortareas, Georgios
Kapetanios, George
- Event
-
Veröffentlichung
- (who)
-
Queen Mary University of London, Department of Economics
- (where)
-
London
- (when)
-
2008
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Chortareas, Georgios
- Kapetanios, George
- Queen Mary University of London, Department of Economics
Time of origin
- 2008
Other Objects (12)
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Getting PPP right: Identifying mean-reverting real exchange rates in panels
How puzzling is the PPP puzzle? An alternative half-life measure of convergence to PPP
Estimating deterministically time-varying variances in regression models
A note on joint estimation of common cycles and common trends in nonstationary multivariate systems
A bootstrap procedure for panel datasets with many cross-sectional units
Unit root testing against the alternative hypothesis of up to m structural breaks
Testing for strict stationarity
Variable selection using non-standard optimisation of information criteria
A note on an iterative least squares estimation method for ARMA and VARMA models
Nonlinear autoregressive models and long memory
Using extraneous information and GMM to estimate threshold parameters in TAR models
Dynamic factor extraction of cross-sectional dependence in panel unit root tests
Getting PPP right: Identifying mean-reverting real exchange rates in panels
How puzzling is the PPP puzzle? An alternative half-life measure of convergence to PPP
Estimating deterministically time-varying variances in regression models
A note on joint estimation of common cycles and common trends in nonstationary multivariate systems
A bootstrap procedure for panel datasets with many cross-sectional units
Unit root testing against the alternative hypothesis of up to m structural breaks
Testing for strict stationarity
Variable selection using non-standard optimisation of information criteria
A note on an iterative least squares estimation method for ARMA and VARMA models
Nonlinear autoregressive models and long memory
Using extraneous information and GMM to estimate threshold parameters in TAR models