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Decomposing the persistence of real exchange rates

Author

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  • Dimitrios Malliaropulos
  • Ekaterini Panopoulou
  • Theologos Pantelidis
  • Nikitas Pittis

Abstract

We propose a new methodology for decomposing the persistence of deviations from purchasing power parity (PPP). By directly comparing the impulse response function (IRF) of a vector autoregressive (VAR) model, where the real exchange rate is Granger caused by a set of candidate variables, with the IRF of the equivalent ARMA model for the real exchange rate, we capture the effects of the Granger-causing variables on the half-life of deviations from PPP. Our empirical results for a set of 20 industrial countries suggest that on average around 50% of the persistence of real exchange rates can be attributed to nominal interest rate differentials, inflation differentials and relative business cycle position with the numenaire country. Finally, we provide confidence intervals for the contributions of the aforementioned variables to the persistence of deviations from PPP by means of Monte Carlo simulations. Copyright Springer-Verlag 2013

Suggested Citation

  • Dimitrios Malliaropulos & Ekaterini Panopoulou & Theologos Pantelidis & Nikitas Pittis, 2013. "Decomposing the persistence of real exchange rates," Empirical Economics, Springer, vol. 44(3), pages 1217-1242, June.
    • Handle: RePEc:spr:empeco:v:44:y:2013:i:3:p:1217-1242
    DOI: 10.1007/s00181-012-0565-5
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    More about this item

    Keywords

    Real exchange rate; Persistence measures; VAR; Impulse response function; PPP; F31; C32;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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