Purchasing Power Parity for Traded and Non-traded Goods: A Structural Error Correction Model Approach
When univariate methods are applied to real exchange rates, point estimates of autoregressive (AR) coefficients typically imply very slow rates of mean reversion. However, a recent study by Murray and Papell (2002) calculates confidence intervals for estimates of half-lives for long-horizon and post-1973 data, and concludes that univariate methods provide virtually no information regarding the size of the half lives. This paper estimates half-lives with a system method based on a structural error correction model for the nominal exchange rate, a domestic price index, a foreign price index, and a monetary variable. The method is applied to estimate half lives of real exchange rates based on producer price indices, consumer price indices, and GDP implicit deflators. The idea is that the traded component of the producer price index (PPI) is proportionately larger than that of the consumer price index (CPI). If the convergence rate is faster for traded goods prices than that for non-traded goods prices, half-lives for the real exchange rate based on the PPI should be shorter than those for the real exchange rate based on the CPI and that on the GDP implicit deflator. Our empirical results are consistent with this view.
Volume (Year): 22 (2004)
Issue (Month): 1 (March)
|Contact details of provider:|| Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103|
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
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.:
- Engel, C., 1996.
"Accounting for U.S. Real Exchange Rate Changes,"
Discussion Papers in Economics at the University of Washington
96-02, Department of Economics at the University of Washington.
- Alan C. Stockman & Linda L. Tesar, 1991.
"Tastes and technology in a two-country model of the business cycle: explaining international co-movements,"
9019, Federal Reserve Bank of Cleveland.
- Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
- Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
- Menzie Chinn & Louis Johnston, 1996.
"Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries,"
NBER Working Papers
5709, National Bureau of Economic Research, Inc.
- Louis Dorrance Johnston & Menzie David Chinn, 1997. "Real Exchange Rate Levels, Productivity and Demand Shocks; Evidence from a Panel of 14 Countries," IMF Working Papers 97/66, International Monetary Fund.
- Stock, James H & Watson, Mark W, 1993.
"A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems,"
Econometric Society, vol. 61(4), pages 783-820, July.
- Tom Doan, . "SWDOLS: RATS procedure to estimate cointegrating vectors using dynamic OLS," Statistical Software Components RTS00207, Boston College Department of Economics.
- James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
- Diebold, Francis X & Husted, Steven & Rush, Mark, 1991.
"Real Exchange Rates under the Gold Standard,"
Journal of Political Economy,
University of Chicago Press, vol. 99(6), pages 1252-71, December.
- Francis X. Diebold & Steven Husted & Mark Rush, 1990. "Real exchange rates under the gold standard," Discussion Paper / Institute for Empirical Macroeconomics 32, Federal Reserve Bank of Minneapolis.
- Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
- Shang-Jin Wei & David C. Parsley, 1995. "Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Papers 5032, National Bureau of Economic Research, Inc.
- Urbain, Jean-Pierre, 1992.
"On Weak Exogeneity in Error Correction Models,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 54(2), pages 187-207, May.
- Fleissig, Adrian R. & Strauss, Jack, 2000. "Panel unit root tests of purchasing power parity for price indices," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 489-506, August.
- 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.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Hyoung-Seok Lim & Masao Ogaki, 2003.
"A Theory of Exchange Rates and the Term Structure of Interest Rates,"
RCER Working Papers
504, University of Rochester - Center for Economic Research (RCER).
- Hyoung-Seok Lim & Masao Ogaki, 2013. "A Theory of Exchange Rates and the Term Structure of Interest Rates," Review of Development Economics, Wiley Blackwell, vol. 17(1), pages 74-87, 02.
- Masao Ogaki, 1999. "A Theory of Exchange Rates and the Term Structure of Interest Rates," Working Papers 99-19, Ohio State University, Department of Economics.
- Kim, Yoonbai, 1990. "Purchasing power parity : Another look at the long-run data," Economics Letters, Elsevier, vol. 32(4), pages 339-344, April.
- Papell, David H., 1997. "Cointegration and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 445-459, June.
- Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
- 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.
- Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Jaebeom Kim, 2004. "Half-lives of Deviations from PPP: Contrasting Traded and Nontraded Components of Consumption Baskets," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 162-168, 02.
- Wu, Yangru, 1996. "Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 54-63, February.
- David Papell, 1998.
"The Great Appreciation, the Great Depreciation, and the Purchasing Power Parity Hypothesis,"
30, Oesterreichische Nationalbank (Austrian Central Bank).
- Papell, David H., 2002. "The great appreciation, the great depreciation, and the purchasing power parity hypothesis," Journal of International Economics, Elsevier, vol. 57(1), pages 51-82, June.
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Ito, Takatoshi, 1997. "The Long-Run Purchasing Power Parity for the Yen: Historical Overview," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 502-521, December.
- Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
- Jaebeom Kim & Masao Ogaki & Minseok Yang, 2003. "Structural Error Correction Models: Instrumental Variables Methods and an application to an exchange rate model," RCER Working Papers 502, University of Rochester - Center for Economic Research (RCER).
- Park, Joon Y, 1992. "Canonical Cointegrating Regressions," Econometrica, Econometric Society, vol. 60(1), pages 119-43, January.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:22:y:2004:i:1:p:1-25. 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: (Kinken)
If references are entirely missing, you can add them using this form.