{
  "title": "Parity Reversion in Real Exchange Rates: Fast, Slow or Not At All?",
  "publication": "IMF Working Papers, July 1, 2004",
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  "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.",
  "sections": [
    {
      "heading": "Key Findings",
      "content": "- Consensus estimates put the half-life of deviations from purchasing power parity (PPP) at about four years (Rogoff, 1996).\n- Conventional least squares estimates of half-lives are biased downward.\n- Using median-unbiased estimators of the half-life of deviations from parity corrects for the downward bias of conventional estimators.\n- Tests for PPP using real effective exchange rate data for 90 developed and developing countries in the post-Bretton Woods period find support for PPP: the majority of countries experience finite deviations of real exchange rates from parity.\n- The speed of parity reversion is typically much faster for developed countries than for developing countries.\n- Parity reversion is considerably faster for countries with flexible nominal exchange rate regimes compared with countries having fixed nominal exchange rate regimes."
    },
    {
      "heading": "Methodology and Data",
      "content": "- Preferred persistence measure: median-unbiased estimators of the half-life of deviations from parity (to correct downward bias of conventional estimators).\n- Data: real effective exchange rate data for 90 developed and developing countries.\n- Sample period: post-Bretton Woods period.\n- Tests employed to evaluate PPP and parity reversion across countries and exchange rate regimes."
    },
    {
      "heading": "Analytical Insights",
      "content": "- Estimation bias:\n  - Conventional least squares methods produce downward-biased half-life estimates.\n  - Median-unbiased estimation provides a more reliable measure of persistence for real exchange rate shocks.\n- Heterogeneity:\n  - Developed vs developing countries: developed countries show typically much faster parity reversion.\n  - Exchange rate regimes: flexible nominal exchange rate regimes exhibit considerably faster parity reversion than fixed regimes.\n- Empirical support:\n  - Majority of the 90 countries analyzed display finite deviations from parity, consistent with PPP reversion over time."
    },
    {
      "heading": "Implications",
      "content": "- Empirical practice:\n  - Researchers estimating half-lives of PPP deviations should account for downward bias in least squares estimates and consider median-unbiased estimators.\n- Policy relevance:\n  - Exchange rate regime choice (flexible vs fixed) is associated with differences in the speed of real exchange rate adjustment; policymakers should consider these dynamics when assessing external competitiveness and adjustment needs.\n- Country heterogeneity:\n  - Distinctions between developed and developing countries matter for expected speed of reversion and should inform macroeconomic modeling and policy design.\n\n---\n\n Content in this bundle\n\n- wp04128\n  - wp04128 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp04128 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/parity-reversion-in-real-exchange-rates-fast-slow-or-not-at-all-17519"
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    "Authors: C. John McDermott, Paul Cashin",
    "Published: July 1, 2004",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451855074.001",
    "Consensus estimates put the half-life of deviations from purchasing power parity (PPP) at about four years (Rogoff, 1996).",
    "Conventional least squares estimates of half-lives are biased downward.",
    "Using median-unbiased estimators of the half-life of deviations from parity corrects for the downward bias of conventional estimators.",
    "Tests for PPP using real effective exchange rate data for 90 developed and developing countries in the post-Bretton Woods period find support for PPP: the majority of countries experience finite deviations of real exchange rates from parity.",
    "The speed of parity reversion is typically much faster for developed countries than for developing countries.",
    "Parity reversion is considerably faster for countries with flexible nominal exchange rate regimes compared with countries having fixed nominal exchange rate regimes.",
    "Preferred persistence measure: median-unbiased estimators of the half-life of deviations from parity (to correct downward bias of conventional estimators).",
    "Data: real effective exchange rate data for 90 developed and developing countries.",
    "Sample period: post-Bretton Woods period.",
    "Tests employed to evaluate PPP and parity reversion across countries and exchange rate regimes.",
    "Estimation bias:",
    "Heterogeneity:",
    "Empirical support:",
    "Empirical practice:",
    "Policy relevance:",
    "Country heterogeneity:",
    "**_wp04128**"
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