Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153507
Authors: 
Peltonen, Tuomas A.
Popescu, Adina
Sager, Michael
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1073
Abstract: 
A core stylized fact of the empirical exchange rate literature is that half-life deviations of equilibrium real exchange rates from levels implied by Purchasing Power Parity (PPP) are very persistent. Empirical efforts to explain this persistence typically proceed along two distinct paths, resorting either to the presence of real shocks such as productivity differentials that drive equilibrium exchange rates away from levels implied by PPP, or the presence of non-linearities in the adjustment process around PPP. By contrast, we combine these two explanations in the context of an innovative panel estimation methodology. We conclude that both explanations are relevant to the behavior of exchange rates and that resulting half-lives are much shorter than estimated using linear PPP and more consistent with the observed volatility of nominal and real exchange rates.
Subjects: 
Balassa-Samuelson
EPSTAR
exchange rate
PPP
productivity
JEL: 
F31
C23
Document Type: 
Working Paper

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