Parity Reversion in Real Exchange Rates: Fast, Slow or Not At All?

July 1, 2004

Preview Citation

Format: Chicago

C. John McDermott, and Paul Cashin. Parity Reversion in Real Exchange Rates: Fast, Slow or Not At All?, (USA: International Monetary Fund, 2004) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Consensus estimates put the half-life of deviations from purchasing power parity (PPP) at about four years (Rogoff, 1996). However, conventional least squares estimates of half-lives are biased downward. Accordingly, as a preferred measure of the persistence of real exchange rate shocks, this study uses median-unbiased estimators of the half-life of deviations from parity, which correct for the downward bias of conventional estimators. The paper tests for PPP using real effective exchange rate data for 90 developed and developing countries in the post-Bretton Woods period. Support for PPP is found, as the majority of countries experience finite deviations of real exchange rates from parity. The speed of parity reversion is found to be typically much faster for developed countries than for developing countries, and to be considerably faster for countries with flexible nominal exchange rate regimes in comparison with countries having fixed nominal exchange rate regimes.

Subject: Exchange rate arrangements, Exchange rates, Foreign exchange, Purchasing power parity, Real effective exchange rates, Real exchange rates

Keywords: Deviations from parity, Exchange rate arrangements, Exchange rate country, Exchange rates, Inflation rate, Least squares, Market data, Nominal exchange rate regime, Nonparametric test, Null hypothesis, Parity deviation, Parity reversion, Post-Bretton Woods, Purchasing power parity, Rank correlation, Real effective exchange rates, Real exchange rate, Real exchange rates, Time series, Western Hemisphere, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/128
Stock No:

WPIEA1282004
ISBN:

9781451855074
ISSN:

1018-5941

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