Temporal aggregation and purchasing power parity persistence |
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Authors: | Yamin Ahmad William D. Craighead |
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Affiliation: | a Department of Economics, University of Wisconsin-Whitewater, 800 W Main Street, Whitewater, WI 53190, USA b Department of Economics, Wesleyan University, 238 Church Street, Middletown, CT 06457, USA |
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Abstract: | This paper uses a unique new monthly US-UK real exchange rate series for the January 1794-December 2009 period to reexamine the academic debate over purchasing power parity (PPP). The consensus view described by Rogoff (1996) is that PPP holds in the long-run, but short-run deviations are very persistent, with half-lives ranging from 3 to 5 years. Most of the literature using long time series relies on the annual data developed by Lee (1976) and Lothian and Taylor (1996), which were both constructed from underlying higher-frequency data sources. Estimates of purchasing power parity persistence using these series may therefore be subject to temporal aggregation bias. We find evidence of aggregation bias which indicates the half-life of PPP deviations has been overestimated in much of the previous literature. We also find that estimates of the half-lives are further reduced once we account for the Harrod (1933)-Balassa (1964)-Samuelson (1964) effect. The result of aggregation bias appears to be robust even when considering the case that real exchange rates exhibit nonlinear dynamics. |
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Keywords: | F31 C22 |
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