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Parity Reversion in Real Exchange Rates: Fast, Slow or Not at All? Author info | Abstract | Publisher info | Download info | Related research | Statistics Paul Cashin
C. John McDermott
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Consensus estimates put the half-life of deviations from purchasing power parity (PPP) at about four years (Rogoff, 1996). However, conventional least squares estimates of half-lives are biased downward. Accordingly, as a preferred measure of the persistence of real exchange rate shocks, this study uses median-unbiased estimators of the half-life of deviations from parity, which correct for the downward bias of conventional estimators. The paper tests for PPP using real effective exchange rate data for 90 developed and developing countries in the post-Bretton Woods period. Support for PPP is found, as the majority of countries experience finite deviations of real exchange rates from parity. The speed of parity reversion is found to be typically much faster for developed countries than for developing countries, and to be considerably faster for countries with flexible nominal exchange rate regimes in comparison with countries having fixed nominal exchange rate regimes.
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Paper provided by International Monetary Fund in its series IMF Working Papers with number
04/128.
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Length: 42 pages
Date of creation: 04 Aug 2004Date of revision:
Handle: RePEc:imf:imfwpa:04/128Contact details of provider: Postal: International Monetary Fund, Washington, DC USA Phone: (202) 623-7000 Fax: (202) 623-4661 Email: Web page: http://www.imf.org/external/pubind.htm More information through EDIRC
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Keywords: Purchasing power parity ; Real effective exchange rates ; Flexible exchange rate policy ; Economic models ; Other versions of this item:
This paper has been announced in the following NEP Reports :
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references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2006.
"Purchasing Power Parity: The Irish Experience Re-visited ,"
Trinity Economics Papers
tep200615, Trinity College Dublin, Department of Economics.
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