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On the Failure of Purchasing Power Parity for Bilateral Exchange Rates after 1973

  • Elliott, Graham
  • Pesavento, Elena

Point estimates suggest mean reversion in real exchange rates; however, it still remains uncomfortable that models without any mean reversion are often compatible with data from the floating period. Studies with data over longer periods find mean reversion, but at the cost of mixing in data from earlier exchange rate arrangements. Pooling the floating period data potentially mixes country pairs with and without mean reversion. We examine tests for mean reversion for individual country pairs where greater power against close alternatives is gained through modeling other economic variables with the real exchange rate. By increasing the power of the tests we find strong evidence of mean reversion.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0080
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 6 (September)
Pages: 1405-1430

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:6:p:1405-1430
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Perron, P., 1989. "Test Consistency With Varying Sampling Frequency," Papers 345, Princeton, Department of Economics - Econometric Research Program.
  2. Charles Engel, 1998. "Long-Run PPP May Not Hold After All," Working Papers 0050, University of Washington, Department of Economics.
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  8. Graham Elliott & Michael Jansson & Elena Pesavento, 2005. "Optimal Power for Testing Potential Cointegrating Vectors With Known Parameters for Nonstationarity," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 34-48, January.
  9. Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August.
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