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

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  • Jeffrey A. Frankel and Andrew K. Rose.

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.,

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Bibliographic Info

Paper provided by University of California at Berkeley in its series Center for International and Development Economics Research (CIDER) Working Papers with number C95-052.

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Date of creation: 01 Jun 1995
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Handle: RePEc:ucb:calbcd:c95-052

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Postal: University of California at Berkeley, Berkeley, CA USA
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Web page: http://www.haas.berkeley.edu/groups/iber/wps/ciderwp.htm
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References

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