IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Temporal aggregation and purchasing power parity persistence

  • Ahmad, Yamin
  • Craighead, William D.

This paper uses a unique new monthly US-UK real exchange rate series for the January 1794-December 2009 period to reexamine the academic debate over purchasing power parity (PPP). The consensus view described by Rogoff (1996) is that PPP holds in the long-run, but short-run deviations are very persistent, with half-lives ranging from 3 to 5 years. Most of the literature using long time series relies on the annual data developed by Lee (1976) and Lothian and Taylor (1996), which were both constructed from underlying higher-frequency data sources. Estimates of purchasing power parity persistence using these series may therefore be subject to temporal aggregation bias. We find evidence of aggregation bias which indicates the half-life of PPP deviations has been overestimated in much of the previous literature. We also find that estimates of the half-lives are further reduced once we account for the Harrod (1933)-Balassa (1964)-Samuelson (1964) effect. The result of aggregation bias appears to be robust even when considering the case that real exchange rates exhibit nonlinear dynamics.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0261560611000702
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 5 (September)
Pages: 817-830

as
in new window

Handle: RePEc:eee:jimfin:v:30:y:2011:i:5:p:817-830
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

References listed on IDEAS
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.:

as in new window
  1. Ivan Paya & David A. Peel, 2005. "A New Analysis Of The Determinants Of The Real Dollar-Sterling Exchange Rate: 1871-1994," Working Papers. Serie AD 2005-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  2. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-98, March.
  3. Officer, Lawrence H., 1983. "Dollar-Sterling Mint Parity and Exchange Rates, 1791–1834," The Journal of Economic History, Cambridge University Press, vol. 43(03), pages 579-616, September.
  4. Andrews, Donald W K & Chen, Hong-Yuan, 1994. "Approximately Median-Unbiased Estimation of Autoregressive Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 187-204, April.
  5. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June.
  6. William D. Craighead, 2010. "Across Time And Regimes: 212 Years Of The Us-Uk Real Exchange Rate," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 951-964, October.
  7. Yamin Ahmad & Ivan Paya, 2014. "Temporal Aggregation of Random Walk Processes and Implications for Asset Prices," Working Papers 14-01, UW-Whitewater, Department of Economics.
  8. Shiu-Sheng Chen & Charles Engel, 2004. "Does "Aggregation Bias" Explain the PPP Puzzle?," NBER Working Papers 10304, National Bureau of Economic Research, Inc.
  9. Choi, Chi-Young & Mark, Nelson C. & Sul, Donggyu, 2006. "Unbiased Estimation of the Half-Life to PPP Convergence in Panel Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 921-938, June.
  10. Mario J. Crucini & Mototsugu Shintani, 2006. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0616, Vanderbilt University Department of Economics.
  11. James H. Stock, 1991. "Confidence Intervals for the Largest Autoresgressive Root in U.S. Macroeconomic Time Series," NBER Technical Working Papers 0105, National Bureau of Economic Research, Inc.
  12. JamesR. Lothian & MarkP. Taylor, 2008. "Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod-Balassa-Samuelson Effect?," Economic Journal, Royal Economic Society, vol. 118(532), pages 1742-1763, October.
  13. Reitz, Stefan & Taylor, Mark P., 2006. "The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis," Discussion Paper Series 1: Economic Studies 2006,08, Deutsche Bundesbank, Research Centre.
  14. Officer, Lawrence H., 1985. "Integration in the American Foreign-Exchange Market, 1791–1900," The Journal of Economic History, Cambridge University Press, vol. 45(03), pages 557-585, September.
  15. Engel, C. & Kim, C.J., 1996. "The Long-Run U.S./U.K. real Exchange Rate," Working Papers 96-14, University of Washington, Department of Economics.
  16. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 945-954, December.
  17. Grilli, Vittorio & Kaminsky, Graciela, 1991. "Nominal exchange rate regimes and the real exchange rate : Evidence from the United States and Great Britain, 1885-1986," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 191-212, April.
  18. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  19. Lutz Kilian & Mark P. Taylor, 2001. "Why Is It So Difficult to Beat the Random Walk Forecast of Exchange Rates?," Working Papers 464, Research Seminar in International Economics, University of Michigan.
  20. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  21. Imbs, Jean & Mumtaz, Haroon & Ravn, Morten O & Rey, Hélène, 2003. "PPP Strikes Back: Aggregation and the Real Exchange Rate," CEPR Discussion Papers 3715, C.E.P.R. Discussion Papers.
  22. Rossi, Barbara, 2002. "Confidence Intervals for Half-life Deviations from Purchasing Power Parity," Working Papers 02-08, Duke University, Department of Economics.
  23. James R. Lothian & Cornelia McCarthy, 2001. "Real Exchange-Rate Behaviour under Fixed and Floating Exchange Rate Regimes," International Finance 0107002, EconWPA.
  24. Álvaro Escribano & Oscar Jordá, 2001. "Testing nonlinearity: Decision rules for selecting between logistic and exponential STAR models," Spanish Economic Review, Springer, vol. 3(3), pages 193-209.
  25. Hegwood, Natalie D & Papell, David H, 1998. "Quasi Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-89, October.
  26. Klovland Jan Tore, 1993. "Zooming in on Sauerbeck: Monthly Wholesale Prices in Britain 1845-1890," Explorations in Economic History, Elsevier, vol. 30(2), pages 195-228, April.
  27. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December.
  28. Christian J. Murray & David H. Papell, 2000. "The Purchasing Power Parity Persistence Paradigm," Econometric Society World Congress 2000 Contributed Papers 0017, Econometric Society.
  29. Dias, Daniel A. & Marques, Carlos Robalo, 2010. "Using mean reversion as a measure of persistence," Economic Modelling, Elsevier, vol. 27(1), pages 262-273, January.
  30. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
  31. Glen, Jack D., 1992. "Real exchange rates in the short, medium, and long run," Journal of International Economics, Elsevier, vol. 33(1-2), pages 147-166, August.
  32. Boyd, Derick & Smith, Ron, 1999. "Testing for Purchasing Power Parity: Econometric Issues and an Application to Developing Countries," Manchester School, University of Manchester, vol. 67(3), pages 287-303, June.
  33. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  34. Andrews, Donald W K, 1993. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models," Econometrica, Econometric Society, vol. 61(1), pages 139-65, January.
  35. Christian Murray & David Papell, 2005. "The purchasing power parity puzzle is worse than you think," Empirical Economics, Springer, vol. 30(3), pages 783-790, October.
  36. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  37. J. D. Byers & D. A. Peel, 2003. "Another example of a non-linear time series with misleading linear properties," Applied Economics Letters, Taylor & Francis Journals, vol. 10(1), pages 47-51.
  38. Cheung, Yin-Wong & Lai, Kon S., 1994. "Mean reversion in real exchange rates," Economics Letters, Elsevier, vol. 46(3), pages 251-256, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:30:y:2011:i:5:p:817-830. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.