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Quantifying the uncertainty about the half-life of deviations from PPP

  • Lutz Kilian

    (Department of Economics, University of Michigan, Ann Arbor, MI 48109-1220, USA and Centre for Economic Policy Research, London, UK)

  • Tao Zha

    (Research Department, Federal Reserve Bank of Atlanta, Atlanta, GA 30303, USA)

We propose a Bayesian framework in which the uncertainty about the half-life of deviations from purchasing power parity can be quantified. Based on the responses to a survey study, we propose a prior probability distribution for the half-life under the recent float intended to capture widely held views among economists. We derive the posterior probability distribution of the half-life under this consensus prior and confirm the presence of substantial uncertainty about the half-life. We provide for the first time a comprehensive formal evaluation of several nonnested hypotheses of economic interest, including Rogoff's (1996) claim that the half-life is contained in the range of 3 to 5 years. We find that no hypothesis receives strong support from the data. Copyright © 2002 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 17 (2002)
Issue (Month): 2 ()
Pages: 107-125

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Handle: RePEc:jae:japmet:v:17:y:2002:i:2:p:107-125
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