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Unbiased Estimation of the Half-Life to PPP Convergence in Panel Data

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  • Choi, Chi-Young
  • Mark, Nelson C.
  • Sul, Donggyu

Abstract

Three potential sources of bias introduce complications for panel data estimation of the half-life of purchasing power parity deviations. They are bias induced by inappropriate cross-sectional aggregation of heterogeneous coefficients, small-sample estimation bias of dynamic lag coefficients, and bias induced by time aggregation of commodity prices. All of these biases have been addressed individually in the literature. In this paper, we address all three biases in arriving at our estimates. Using an annual panel data set of CPI-based real exchange rates for 21 OECD countries from 1973 to 1998, we obtain a point estimate of the unbiased half-life of 3.0 years with a 95% confidence interval of 2.3-4.2 years.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0052
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 4 (June)
Pages: 921-938

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:4:p:921-938

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Imbs, Jean & Mumtaz, Haroon & Ravn, Morten O. & Rey, Hélène, 2003. "PPP Strikes Back: Aggregation and the Real Exchange Rate," CEPR Discussion Papers 3715, C.E.P.R. Discussion Papers.
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  10. Choi, Chi-Young, 2004. "Searching for evidence of long-run PPP from a post-Bretton Woods panel: separating the wheat from the chaff," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1159-1186.
  11. Peter C.B. Phillips & Donggyu Sul, 2004. "Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence," Yale School of Management Working Papers ysm428, Yale School of Management.
  12. Brewer, K. R. W., 1973. "Some consequences of temporal aggregation and systematic sampling for ARMA and ARMAX models," Journal of Econometrics, Elsevier, vol. 1(2), pages 133-154, June.
  13. Chi-Young Choi & Nelson C. Mark & Donggyu Sul, 2004. "Bias Reduction by Recursive Mean Adjustment in Dynamic Panel Data Models," Econometrics 0409005, EconWPA.
  14. Rossana, Robert J & Seater, John J, 1992. "Aggregation, Unit Roots and the Time Series Structure on Manufacturing Real Wages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 159-79, February.
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  17. Papell, David H., 2006. "The Panel Purchasing Power Parity Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 447-467, March.
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