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The behavior of real exchange rates: the case of Japan

Listed author(s):
  • Chang, Ming Jen
  • Lin, Chang Ching
  • Yin, Shou-Yung

The study examines the convergence rate of mean reversion by contrasting the estimated half-life of real exchange rate (RER). We employ an extensive monthly consumer price index (CPI)-based product price’s panel for Japan (the U.S. as the num´eraire). We find that the disaggregated RERs are persistent due to the cross-sectional dependence problems. By controlling common correlated effects, the estimated half-life for all goods may fall to as low as 2.54 years, below the consensus view of 3 to 5 years summarized by Rogoff (1996). After correcting the small-sample bias, the estimated half-life of deviations from purchasing power parity (PPP) increase by 1.03 year. Our findings also support that the half-life of mean reversion of RER is about 3.55 years for traded goods, about 0.11 year lower than non-traded goods. We also show that traded goods and non-traded goods perform distinct distributions of persistence.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35447.

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Date of creation: 10 Apr 2011
Handle: RePEc:pra:mprapa:35447
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