An Unbiased Appraisal of Purchasing Power Parity

36 Pages Posted: 6 Feb 2006

See all articles by Paul Anthony Cashin

Paul Anthony Cashin

International Monetary Fund (IMF)

C. John McDermott

National Bank of New Zealand

Date Written: December 2001

Abstract

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.

Keywords: Median-unbiased estimation, purchasing power parity, shock persistence

JEL Classification: C22, F31

Suggested Citation

Cashin, Paul Anthony and McDermott, C. John, An Unbiased Appraisal of Purchasing Power Parity (December 2001). IMF Working Paper No. 01/196, Available at SSRN: https://ssrn.com/abstract=880318

Paul Anthony Cashin (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

C. John McDermott

National Bank of New Zealand ( email )

P.O. Box 540
Wellington
New Zealand

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