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A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries

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  • Frankel, Jeffrey A.
  • Rose, Andrew K.

Abstract

Previous time-series studies have shown evidence of mean-reversion in real exchange rates. Deviations from purchasing power parity (PPP) appear to have half-lives of approximately four years. However, the long samples required for statistical significance are unavailable for most currencies, and are potentially inappropriate because of regime changes. In this study, we re-examine deviations from PPP using a panel of 150 countries and 45 annual post WWII observations. Our panel shows strong evidence of mean-reversion that is similar to that from long time-series. PPP deviations are eroded at a rate of approximately 15 percent annually, i.e., their half-life is around four years. Such findings can be masked in timeseries data, but are relatively easy to find in cross-sections.

Suggested Citation

  • Frankel, Jeffrey A. & Rose, Andrew K., 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," Center for International and Development Economics Research (CIDER) Working Papers 233411, University of California-Berkeley, Department of Economics.
    • Handle: RePEc:ags:ucbewp:233411
    DOI: 10.22004/ag.econ.233411
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    Keywords

    Financial Economics; International Relations/Trade;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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