Article ID Journal Published Year Pages File Type
964362 Journal of International Money and Finance 2010 19 Pages PDF
Abstract

This paper addresses the degree to which models which exhibit nonlinear mean reversion (NMR) present a resolution to the Purchasing Power Parity Puzzle. This paper develops a method of estimating a representative distribution of half lives which is based upon the observed distribution of shocks in a given time series rather than choosing shock sizes arbitrarily which is the current practice in the literature. This approach is implemented with data on five real exchange rates. The empirical analysis shows that half lives shorter than the consensus are observed frequently enough to support the proposition that NMR is a solution to the PPP puzzle.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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