Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/85862
Authors: 
Kleijn, Richard
van Dijk, Herman K.
Year of Publication: 
2001
Series/Report no.: 
Tinbergen Institute Discussion Paper 01-105/4
Abstract: 
The failure to describe the time series behaviour of most realexchange rates as temporary deviations from fixedlong-term means may be due to time variation of the equilibriathemselves, see Engel (2000). We implement thisidea using an unobserved components model and decompose theobservations on real exchange rates in long-termcomponents, which capture the time-variation of the mean and inmedium and short-term components whichmeasure temporary deviations. A simulation-based Bayesian analysis isintroduced to compute the posteriordistribution of (functions) of the model parameters. A stationaritytest in this setup indicates that the mean isslowly time-varying. Subsequently, we use our flexible model toderive the implied distributions of some keyfeatures of real exchange rates. Most notably, the half-life ofdeviations from the mean, which is a measure ofpersistence, is lowered. This provides a possible explanation for thePPP puzzle.
Subjects: 
purchasing power parity puzzle
real exchange rate
time-varying mean
Gibbs sampling
JEL: 
C11
C32
C52
F30
Document Type: 
Working Paper

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