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An Unbiased Appraisal of Purchasing Power Parity

  • C. John McDermott
  • Paul Cashin

Univariate studies of the hypothesis of unit roots in real exchange rates have yielded consensus point estimates of the half-life of deviations from purchasing power parity of between three to five years. However, least squares-based estimates of half-lives are biased downward. Accordingly, we follow Andrews (1993) and use median-unbiased estimators of the half-life of deviations from parity as a preferred measure of the persistence of real exchange rate shocks. We study this issue using real effective exchange rate (REER) data for 22 industrial countries in the post-Bretton Woods period. Three methods of bias correction are implemented, which yield cross-country averages of half-lives of deviations from parity ranging between 4 to 15 years, with the REER of several countries displaying permanent deviations from parity.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/196.

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Length: 35
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/196
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