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Median-unbiased estimation in DF-GLS regressions and the PPP puzzle

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  • Claude Lopez
  • Christian J. Murray
  • David H. Papell

Abstract

Using median-unbiased estimation based on Augmented Dickey--Fuller (ADF) regressions, recent research has questioned the validity of Rogoff's ‘remarkable consensus’ of 3--5 year half-lives of deviations from Purchasing Power Parity (PPP). The confidence intervals of these half-life estimates, however, are extremely wide, with lower bounds of about 1 year and upper bounds of infinity. We extend median-unbiased estimation to the Dickey--Fuller Generalized Least Square (DF-GLS) regression of Elliott et al . (1996). We find that combining median-unbiased estimation with this regression has the potential to tighten confidence intervals for the half-lives. Using long-horizon real exchange rate data, we find that the typical lower bound of the confidence intervals for median-unbiased half-lives is just below 3 years. Thus, while previous confidence intervals for median-unbiased half-lives are consistent with virtually anything, our tighter confidence intervals are inconsistent with economic models with nominal rigidities as candidates for explaining the observed behaviour of real exchange rates and move us away from solving the PPP puzzle.

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File URL: http://hdl.handle.net/10.1080/00036846.2011.605761
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 45 (2013)
Issue (Month): 4 (February)
Pages: 455-464

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Handle: RePEc:taf:applec:45:y:2013:i:4:p:455-464

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Cited by:
  1. M. Dolores Gadea & Laura Mayoral, 2009. "Aggregation is not the solution: the PPP puzzle strikes back," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 875-894.
  2. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
  3. Kanas, Angelos, 2006. "Purchasing Power Parity and Markov Regime Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1669-1687, September.

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