Decline in the persistence of real exchange rates, but not sufficient for purchasing power parity

Tatsuyoshi Okimoto, Katsumi Shimotsu

    Research output: Contribution to journalArticle

    Abstract

    The paper investigates the possibility of decline in the persistence of real exchange rates, or deviations from PPP. To this end, we test the null hypothesis of no decline in the PPP deviation persistence between two subsamples using a fractional integration framework. The test rejects the null at the 10% significance level for nine out of 17 countries, providing solid evidence for a decline in the persistence of real exchange rates. However, the decline is not sufficient for PPP, meaning we fail to reject the unit root hypothesis even in the latter period for all 17 countries. In addition, our rolling-window estimates show that the real exchange rate of many countries have experienced a sharp drop in their persistence once we use samples starting from the mid-1980s. Finally, we examine the relationship between the dynamics of PPP deviation persistence and several economic variables and confirm that the speed of convergence of PPP deviations is highly related to economic/financial integration and world economic stabilization.
    Original languageEnglish
    Pages (from-to)395-411
    JournalJournal of the Japanese and International Economies
    Volume24
    Issue number3
    DOIs
    Publication statusPublished - 2010

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