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A Nonparametric Study of Real Exchange Rate Persistence over a Century

  • Hyeongwoo Kim
  • Deockhyun Ryu

This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to the US dollar. We use nonparametric operational algorithms by El-Gamal and Ryu (2006) for general nonlinear models based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). We found substantially shorter maximum half-life (MHL) estimates than the counterpart from linear models, which is robust to the choice of bandwidth with exceptions of Canada and Japan.

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File URL: http://cla.auburn.edu/econwp/Archives/2013/2013-08.pdf
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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2013-08.

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Date of creation: Jul 2013
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Handle: RePEc:abn:wpaper:auwp2013-08
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Web page: http://cla.auburn.edu/economics/

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  1. 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.
  2. Mario J. Crucini & Mototsugu Shintani, 2002. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0222, Vanderbilt University Department of Economics, revised Jul 2004.
  3. El-Gamal, Mahmoud A. & Ryu, Deockhyun, 2006. "Short-memory and the PPP hypothesis," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 361-391, March.
  4. Jean Imbs & Haroon Mumtaz & Morten Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation and the Real Exchange Rate," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 1-43, January.
  5. Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 2001. "Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 379-399, June.
  6. Shiu-Sheng Chen & Charles Engel, 2005. "Does 'Aggregation Bias' Explain The Ppp Puzzle?," Pacific Economic Review, Wiley Blackwell, vol. 10(1), pages 49-72, 02.
  7. Jón Steinsson, 2008. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models," NBER Working Papers 13910, National Bureau of Economic Research, Inc.
  8. Kilian, Lutz & Taylor, Mark P., 2001. "Why is it so difficult to beat the random walk forecast of exchange rates?," Working Paper Series 0088, European Central Bank.
  9. Lopez, Claude & Murray, Christian J & Papell, David H, 2005. "State of the Art Unit Root Tests and Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 361-69, April.
  10. Mototsugu Shintani, 2006. "A nonparametric measure of convergence towards purchasing power parity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 589-604.
  11. Rossi, Barbara, 2002. "Confidence Intervals for Half-life Deviations from Purchasing Power Parity," Working Papers 02-08, Duke University, Department of Economics.
  12. Lothian, James R. & Taylor, Mark P., 2006. "Real Exchange Rates Over the Past Two Centuries : How Important is the Harrod-Balassa-Samuelson Effect?," The Warwick Economics Research Paper Series (TWERPS) 768, University of Warwick, Department of Economics.
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  14. Christian J. Murray & David H. Papell, 2000. "The Purchasing Power Parity Persistence Paradigm," Econometric Society World Congress 2000 Contributed Papers 0017, Econometric Society.
  15. Lee, Chia-Hao & Chou, Pei-I, 2013. "The behavior of real exchange rate: Nonlinearity and breaks," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 125-133.
  16. Potter, Simon M., 2000. "Nonlinear impulse response functions," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1425-1446, September.
  17. Kim, Hyeongwoo & Moh, Young-Kyu, 2009. "A Century of Purchasing Power Parity Confirmed: The Role of Nonlinearity," MPRA Paper 17488, University Library of Munich, Germany.
  18. Granger, Clive W J, 1995. "Modelling Nonlinear Relationships between Extended-Memory Variables," Econometrica, Econometric Society, vol. 63(2), pages 265-79, March.
  19. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1993. "Nonlinear Dynamic Structures," Econometrica, Econometric Society, vol. 61(4), pages 871-907, July.
  20. Joon Y. Park & Mototsugu Shintani, 2006. "Testing for a Unit Root against Transitional Autoregressive Models," Levine's Bibliography 321307000000000316, UCLA Department of Economics.
  21. Alan M. Taylor, 2002. "A Century Of Purchasing-Power Parity," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 139-150, February.
  22. Hansen,B.E., 1998. "The grid bootstrap and the autoregressive model," Working papers 26, Wisconsin Madison - Social Systems.
  23. DavidC. Parsley & Shang-Jin Wei, 2007. "A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates," Economic Journal, Royal Economic Society, vol. 117(523), pages 1336-1356, October.
  24. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  25. Murray, Christian J. & Papell, David H., 2005. "Do Panels Help Solve the Purchasing Power Parity Puzzle?," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 410-415, October.
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