Exchange rates, prices and their speed of adjustment
This paper addresses the problem of measuring the speed of adjustment of exchange rates and relative prices to purchasing power parity (PPP), in the multivariate context of Vector Autoregressive Processes (VAR). We consider the speed of adjustment of one variable y in response to another variable x, where x, y belong to the VAR. We propose a multivariate measure defined as the forecasting horizon for which the cumulated interim multiplier of x on y surpasses a given fraction p of the corresponding total multiplier. This measure of speed for p = 1/2 coincides with the usual concept of half-life when restricted to univariate processes. We emphasize the importance to separate the concepts of long run e¤ect size and its speed of adjustment, where the latter is unambiguosly defined only when the long run e¤ect is non-zero. We discuss likelihood-based point estimators and confidence sets for this notion of half-life, and reconsider evidence on adjustment to PPP in monthly post-Bretton Woods data for five major industrialized countries against the U.S. dollar. Results show that nominal exchange rates bu¤er the entire adjustment to PPP disequilibrium, wheras relative prices do not adjust either in the short or the long run to PPP deviations. Concluding in such a situation that prices adjust faster than exchange rates is a matter of how one interprets the absence of short run and long run effects.
|Date of creation:||Sep 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.uninsubria.it/uninsubria/facolta/econo.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cecilia Chaing & Lindsay McSweeney, 2010. "A Behavioral Model of Rational Choice," CPI Journal, Competition Policy International, vol. 6.
- Secchi Davide & Bardone Emanuele, 2005. "Extending the Bounded Rationality Model: The Distributed Cognition Approach," Economics and Quantitative Methods qf0506, Department of Economics, University of Insubria.
- Gary S. Becker, 1974.
"A Theory of Social Interactions,"
NBER Working Papers
0042, National Bureau of Economic Research, Inc.
- Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
- Simon, Herbert A, 1993.
"Altruism and Economics,"
American Economic Review,
American Economic Association, vol. 83(2), pages 156-61, May.
- Khalil, Elias L., 2004. "What is altruism?," Journal of Economic Psychology, Elsevier, vol. 25(1), pages 97-123, February.
- Simon, Herbert A, 1979.
"Rational Decision Making in Business Organizations,"
American Economic Review,
American Economic Association, vol. 69(4), pages 493-513, September.
- Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
- Secchi Davide, 2005. "Altruism and Selfish Behavior. The Docility Model Revisited," Economics and Quantitative Methods qf0505, Department of Economics, University of Insubria.
- Knudsen, Thorbjorn, 2003. "Simon's selection theory: Why docility evolves to breed successful altruism," Journal of Economic Psychology, Elsevier, vol. 24(2), pages 229-244, April.
When requesting a correction, please mention this item's handle: RePEc:ins:quaeco:qf0607. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Segreteria Dipartimento)The email address of this maintainer does not seem to be valid anymore. Please ask Segreteria Dipartimento to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.