Half-Life Deviations from PPP in the SADC

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Half-Life Deviations from PPP in the SADC

Author Info

Thabo Mokoena () (South African Reserve Bank, Pretoria)
Rangan Gupta () (Department of Economics, University of Pretoria)
Renee van Eyden () (Department of Economics, University of Pretoria)

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Rangan Gupta

Abstract

This paper utilises various recently developed econometric methods to obtain better approximations to the half-life for real exchange rates of ten South African Development Community (SADC) countries and to generate confidence intervals for half-life deviations from the purchasing power parity (PPP). The robust methods of Stock (1991), Elliott and Stock (2001), and Hansen (1999) imply that point estimates of less than 36 months exist, making them compatible with PPP. However, the results of ADF and ADF-GLS tests render the SADC real exchange rates as nonstationary processes, a result that is patently at odds with mean-reversion, implying at the same time the possibility of infinite half-lives. Therefore the empirical results appearing in this paper do not convincingly resolve the half-life version of the PPP puzzle and leaves room for future research in the directions of non-parametric methods and median unbiased confidence intervals.

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Publisher Info
Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200823.

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Length: 11 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:pre:wpaper:200823

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
F30 - International Economics - - International Finance - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-07-05 (All new papers)
NEP-CBA-2008-07-05 (Central Banking)
NEP-IFN-2008-07-05 (International Finance)

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