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Purchasing Power Parity Adjustment Speeds in High Frequency Data when the Equilibrium Real Exchange Rate is Proxied by a Deterministic Trend

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  • Ivan Paya
  • David A. Peel

Abstract

Rogoff suggested in 1996 that the dollar–yen real exchange rate represented a ‘canonical’ case of a trend in the equilibrium real exchange rate. The implied speed of adjustment of the dollar–yen real exchange rate is found to be substantially faster, with half‐life shocks of less than 2 years, from estimates of a non‐linear model which incorporates a deterministic trend proxying the equilibrium level. We also examine the power of unit root tests against smooth transition non‐linear models which incorporate a deterministic trend and the robustness of such non‐linear estimations using Monte Carlo and bootstrap simulations.

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  • Ivan Paya & David A. Peel, 2003. "Purchasing Power Parity Adjustment Speeds in High Frequency Data when the Equilibrium Real Exchange Rate is Proxied by a Deterministic Trend," Manchester School, University of Manchester, vol. 71(s1), pages 39-53, September.
    • Handle: RePEc:bla:manchs:v:71:y:2003:i:s1:p:39-53
    DOI: 10.1111/1467-9957.71.s.3
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    Cited by:

    1. Milas Costas & Legrenzi Gabriella, 2006. "Non-linear Real Exchange Rate Effects in the UK Labour Market," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(1), pages 1-34, March.
    2. Michael Frömmel & Darko B. Vukovic & Jinyuan Wu, 2022. "The Dollar Exchange Rate, Adjustment to the Purchasing Power Parity, and the Interest Rate Differential," Mathematics, MDPI, vol. 10(23), pages 1-17, November.
    3. Copeland, Laurence & Heravi, Saeed, 2006. "Structural Breaks in the Real Exchange Rate Adjustment Mechanism," Cardiff Economics Working Papers E2006/21, Cardiff University, Cardiff Business School, Economics Section.
    4. Laurence Copeland, 2007. "Arbitrage Bounds and the Time Series Properties of the Discount on UK Closed‐End Mutual Funds," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 313-330, January.
    5. Wu, Jyh-Lin & Hu, Yu-Hau, 2009. "New evidence on nominal exchange rate predictability," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 1045-1063, October.
    6. Milas, C., 2003. "Non-linear multivariate adjustment of the UK real exchange rate," Working Papers 03/08, Department of Economics, City University London.
    7. Narayan Paresh K & Prasad Biman Chand, 2005. "The Validity of Purchasing Power Parity Hypothesis for Eleven Middle Eastern Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 3(2), pages 44-58, August.

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