Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154009
Authors: 
Ca' Zorzi, Michele
Muck, Jakub
Rubaszek, Michał
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1576
Abstract: 
This paper brings three new insights into the Purchasing Power Parity (PPP) debate. First, we show that a half-life PPP model is able to forecast real exchange rates (RER) better than the random walk (RW) model at both short and long-term horizons. Secondly, we find that this result holds only if the speed of adjustment to the sample mean is calibrated at reasonable values rather than estimated. Finally, we find that it is also preferable to calibrate, rather than to elicit as a prior, the parameter determining the speed of adjustment to PPP.
Subjects: 
Exchange rate forecasting
half-life
purchasing power parity
JEL: 
C32
F31
F37
Document Type: 
Working Paper

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