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 to identify the real exchange rates that are stationary and poolable without trading-off any test power. We apply procedures that account for cross-sectional dependence. Our results reveal evidence of mean-reversion that is significantly stronger as compared to those obtained by the existing literature, strengthening the case for PPP. Moreover, our approach allows to provide half-lives estimates for the mean-reverting real exchange rates and so 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. 517
- Classification
-
Wirtschaft
Hypothesis Testing: General
Statistical Simulation Methods: General
Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
- Subject
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PPP, Real exchange rates, Half-lives, Panel unit root tests
Kaufkraftparität
Panel
Unit Root Test
Schätzung
OECD-Staaten
Mean Reversion
- Event
-
Geistige Schöpfung
- (who)
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Chortareas, Georgios
Kapetanios, George
- Event
-
Veröffentlichung
- (who)
-
Queen Mary University of London, Department of Economics
- (where)
-
London
- (when)
-
2004
- Handle
- Last update
-
10.03.2025, 11:42 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
- 2004
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
Testing for ARCH in the presence of nonlinearity of unknow form in the conditional mean
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
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
Testing for ARCH in the presence of nonlinearity of unknow form in the conditional mean
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