Examining the evidence of purchasing power parity by recursive mean adjustment
AbstractThis paper revisits the empirical evidence of purchasing power parity under the current float by recursive mean adjustment (RMA) proposed by So and Shin (1999). We first report superior power of the RMA-based unit root test in finite samples relative to the conventional augmented Dickey–Fuller (ADF) test via Monte Carlo experiments for 16 linear and nonlinear autoregressive data generating processes. We find that the more powerful RMA-based unit root test rejects the null hypothesis of a unit root for 16 out of 20 current float real exchange rates relative to the US dollar, while the ADF test rejects only 5 at the 10% significance level. We also find that the computationally simple RMA-based asymptotic confidence interval can provide useful information regarding the half-life of the real exchange rate.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 29 (2012)
Issue (Month): 5 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Recursive mean adjustment; Finite sample performance; Purchasing power parity; Half-life;
Other versions of this item:
- Kim, Hyeongwoo & Moh, Young-Kyu, 2010. "Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment," MPRA Paper 22712, University Library of Munich, Germany.
- Hyeongwoo Kim & Young-Kyu Moh, 2010. "Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment," Auburn Economics Working Paper Series auwp2010-08, Department of Economics, Auburn University.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
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