Border region panel evidence on PPP deviations

This article examines prices for 32 identical menu items sold by restaurant franchises operating on both sides of the border between El Paso in the US and Ciudad Juárez in Mexico from July 1997 to June 2008. The relationship between Real Exchange Rate (RER) volatility and the degree of price convergence is examined within a panel data context. The city-pair and goods selected provide a unique experiment in which distance, tradability and industry considerations are set aside and the extent of RER volatility is the only factor to influence price convergence. We find nonmonotonic relationships between mean reversion and RER volatility: very fast adjustments for both low and high volatility panels of goods (between 1 and 2 months) and slower half-lives (between 3 and 4 months) at moderate levels of uncertainty. These figures are, however, substantially smaller than the 6 or 7 months reported in previous research for general US–Mexico goods, suggesting the very strong price convergence observed along the US–Mexican border.     

Resuscitating real interest rate parity: new evidence from panels

This paper considers the real interest rate parity (RIRP) in OECD countries applying a sequential panel selection (SPS) method on alternative panel unit-root tests. Our approach exploits the enhanced power of panels to uncover evidence of stationarity, but also identifies the exact countries for which the RIRP holds in a panel. Moreover, we construct real interest rate measures using alternative approaches, including a Markov regime-switching procedure, which is consistent with the forward-looking nature of inflation expectations formation. Considering US as the benchmark economy, we produce strong evidence of stationarity in real interest rate differentials, which resuscitates RIRP, especially given the inconclusive results in the related literature. Our results are robust to different panel unit-root tests, measures of inflation expectations, and interest rate maturities. The RIRP appears quite resilient in the face of the global financial crisis and the low real interest rate environment after the great recession. The SPS allows to calculate half-lives, which avoid the pitfalls of over/underestimating the speed of adjustment and are lower as compared to the typical estimates in the literature.     

The purchasing power parity puzzle is worse than you think

The ‘‘purchasing power parity puzzle’’ is the difficulty of reconciling very high short-term volatility of real exchange rates with very slow rates of mean reversion. The strongest evidence of slow mean reversion comes from least squares estimates of first-order autoregressive models of the long-horizon dollar-sterling real exchange rate. Using median-unbiased estimation methods, we show that these methods underestimate the half-lives of PPP deviations, and thus overestimate the speed of mean reversion. When the specification is amended to allow for serial correlation, the speed of mean reversion falls even further. This makes resolution of the purchasing power parity puzzle more problematic.First version received: May 2003/Final version received: July 2004We thank Lutz Kilian, James Lothian, Mark Taylor, and two anonymous referees for helpful comments and suggestions.     

Real interest rate parity in Asian countries: evidence from the quantile unit root test

This article studies the real interest rate parity (RIP) for several Asian countries. This is done by examining the stationarity in the real interest rate differentials (rids) with respect to the US using the quantile unit root test. Our results show that rids exhibits unit-root behaviours in the lower quantile levels, and mean reversion in the upper quantile levels. Furthermore, large positive shocks tend to induce strong mean reversion and the adjustment towards the long-run equilibrium level is faster as rids gets larger, with shorter half-lives in the extreme quantile levels.     

Parity reversion in the Asian real exchange rates: new evidence from the local-persistent model

This article investigates the time-series properties of 13 Asian real exchange rates (RERs) vis-à-vis the US dollar. The half-life point estimates drawn from the local-persistent model are all less than 2 years, with a finite upper bound. There is no evidence to indicate that the Asian financial crisis has altered the speed of the purchasing power parity (PPP) adjustments. We find that the persistence of RERs over the last three decades remains unchanged in majority of the cases. Given the fairly rapid speed of adjustments and their corresponding confidence intervals, we conclude that the PPP puzzle does not exist in these countries.