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Deviations from Purchasing Power Parity

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  • Fung, Hung-Gay
  • Lo, Wai-Chung
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    Abstract

    This study uses univariate and multivariate unit root tests to analyze the random walk behavior of real exchange rates for the period 1979-1989. The univariate test fails to reject the random walk model, but the multivariate test indicates that part of the real exchange rates is predictable, a result supporting purchasing power parity. Further analysis of the random walk component in real exchange rates shows that it is quite persistent: for all currencies it takes about five to eight years for this shock to diminish to half its size. Copyright 1992 by MIT Press.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal The Financial Review.

    Volume (Year): 27 (1992)
    Issue (Month): 4 (November)
    Pages: 553-70

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    Handle: RePEc:bla:finrev:v:27:y:1992:i:4:p:553-70

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    Web page: http://www.easternfinance.org/
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    Web: http://www.blackwellpublishing.com/subs.asp?ref=0732-8516

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    Cited by:
    1. Thabo M. Mokoena & Gupta, R. & Van Eyden, R., 2009. "Half-Life Deviations from PPP in the South African Development Community (SADC)," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
    2. Zhou, Su & Mahdavi, Saeid, 1996. "Simple vs. generalized interest rate and purchasing power parity models of exchange rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(2), pages 197-218.
    3. Georgios Chortareas & George Kapetanios, 2005. "How Puzzling is the PPP Puzzle? An Alternative Half-Life Measure of convergence to PPP," Money Macro and Finance (MMF) Research Group Conference 2005 36, Money Macro and Finance Research Group.
    4. Bessec, Marie, 2003. "Mean-reversion vs. adjustment to PPP: the two regimes of exchange rate dynamics under the EMS, 1979–1998," Economics Papers from University Paris Dauphine 123456789/12206, Paris Dauphine University.
    5. Bevilacqua, Franco, 2006. "Random walks and cointegration relationships in international parity conditions between Germany and USA for the post Bretton-Woods period," MERIT Working Papers 012, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    6. Yihui Lan, 2001. "The Explosion of Purchasing Power Parity," Economics Discussion / Working Papers 01-22, The University of Western Australia, Department of Economics.
    7. Cochran, Steven J. & DeFina, Robert H., 1996. "Predictability in real exchange rates: Evidence from parametric hazard models," International Review of Economics & Finance, Elsevier, vol. 5(2), pages 125-147.
    8. Marie Bessec, 2000. "Mean-Reversion versus PPP Adjustment: The Two Regimes of Exchange Rate Dynamics Under the EMS, 1979-1998," Econometric Society World Congress 2000 Contributed Papers 1305, Econometric Society.
    9. Bevilacqua, Franco, 2006. "Random walks and cointegration relationships in international parity conditions between Germany and USA for the Bretton-Woods period," MERIT Working Papers 016, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    10. Franco Bevilacqua & Adriaan van Zon, 2002. "Random Walks and Non-Linear Paths in Macroeconomic Time Series: Some Evidence and Implications," Working Papers geewp22, Vienna University of Economics Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.

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