Lopez, Claude and Murray, Chris and Papell, David (2009): Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle.
This is the latest version of this item.
Download (368Kb) | Preview
Using median-unbiased estimation, recent research has questioned the validity of Rogoff’s “remarkable consensus” of 3-5 year half-lives of deviations from PPP. These half-life estimates, however, are based on estimates from regressions where the resulting unit root test has low power. We extend median-unbiased estimation to the DF-GLS regression of Elliott, Rothenberg, and Stock (1996). We find that median-unbiased estimation based on this regression has the potential to tighten confidence intervals for half-lives. Using long horizon real exchange rate data, we find that the typical lower bound of the confidence intervals for median-unbiased half-lives is just under 3 years. Thus, while previous confidence intervals for half-lives are consistent with virtually anything, our tighter confidence intervals now rule out economic models with nominal rigidities as candidates for explaining the observed behavior of real exchange rates. Therefore, while we obtain more information using efficient unit root tests on longer term data, this information moves us away from solving the PPP puzzle.
|Item Type:||MPRA Paper|
|Original Title:||Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle|
|Keywords:||PPP, median unbiased, detrended half life|
|Subjects:||C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Claude Lopez|
|Date Deposited:||25. Oct 2010 07:54|
|Last Modified:||12. Feb 2013 02:08|
Abuaf, N. and P. Jorion, 1990, “Purchasing power parity in the long run,” Journal of Finance 45, 157-174.
Andrews, D.W.K, 1993, “Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models,” Econometrica 61: 139-165.
Andrews, D.W.K., and H.-Y. Chen, 1994, “Approximately Median-Unbiased Estimation of Autoregressive Models,” Journal of Business and Economic Statistics 12: 187-204.
Cheung, Y.-W., and K.S. Lai, 1994, “Mean Reversion in Real Exchange Rates,” Economics Letters 46, 251-56.
Cheung, Y.-W. and K.S. Lai, 2000, “On the Purchasing Power Parity Puzzle,” Journal of International Economics 52: 321-330.
Choi, C.Y., Mark, N., and D. Sul, 2005, “Unbiased Estimation of the Half-Life to PPP Convergence in Panel Data,” forthcoming, Journal of Money, Credit and Banking.
Diebold, F., Husted, S., and Rush, M. 1991, “Real Exchange Rates Under the Gold Standard,” Journal of Political Economy 99, 1252-1271.
Elliott G, and Stock, J.H., “Confidence Intervals for Autoregressive Coefficients Near One,” Journal of Econometrics 103: 155-181.
Elliott, G. and Pesavento, E., 2006, “On the Failure of Purchasing Power Parity for Bilateral Exchange Rates after 1973,” Journal of Money, Credit and Banking, 38:1405-1430.
Elliott, G., Rothenberg, T., and Stock, J.H., 1996, “Efficient Tests for an Autoregressive Unit Root,” Econometrica 64:813-836.
Engel, C.M., 2000, “Long-Run PPP May Not Hold After All,” Journal of International Economics 51: 243-273.
Frankel, J., 1986, “International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?” in R. Hafer, ed., How Open is the U.S. Economy?, Lexington Books.
Glen, J.H., 1992, “Real Exchange Rates in the Short, Medium, and Long Run,” Journal of International Economics 33, 147-66.
Hansen, B., 1999, “The Grid Bootstrap and the Autoregressive Model,” The Review of Economics and Statistics 81, 594-607.
Imbs, J., Mumtaz, H., Ravin, M. and H. Rey, 2005, “PPP Strikes Back: Aggregation and the Real Exchange Rate,” Quarterly Journal of Economics 120, 1-43.
Inoue, A, and L. Kilian, 2002, “Bootstrapping Autoregressive Processes with Possible Unit Roots,” Econometrica 70: 377-391.
Kilian, L., 1998, “Small-Sample Confidence Intervals for Impulse Response Functions,” The Review of Economics and Statistics 80, 218-230.
Kilian, L., 1999, “Finite-Sample Properties of Percentile and Percentile-t Bootstrap Confidence Intervals for Impulse Responses,” The Review of Economics and Statistics 81, 652-660.
Kilian, L., and T. Zha, 2002, “Quantifying the Uncertainty about the Half-Life of Deviations from PPP,” Journal of Applied Econometrics 17:107-125.
Lothian, J., and M. Taylor, 1996, “Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries.” Journal of Political Economy 104: 488-509.
Müller, U.K., and G. Elliott, 2003, “Tests for Unit Roots and the Initial Condition,” Econometrica 71: 1269-1286.
Murray, C.J., and D.H. Papell, 2002, “The Purchasing Power Parity Persistence Paradigm,” Journal of International Economics 56: 1-19.
Murray, C.J., and D.H. Papell, 2005, “Do Panels Help Solve the PPP Puzzle?,” Journal of Business and Economics Statistics 23: 410-415.
Ng. S. and P. Perron, 2001 “Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power.” Econometrica 69: 1519-1554.
Papell, D.H, and R. Prodan, 2007, “Restricted Structural Change and the Unit Root Hypothesis,” Economic Inquiry: 45: 834-853.
Perron, P., 1989, “The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis,” Econometrica 57, 1361-1401.
Rogoff, K., 1996, “The Purchasing Power Parity Puzzle,” Journal of Economic Literature 34: 647-668.
Rossi, B., 2005, “Confidence Intervals for Half-Life Deviations from Purchasing Power Parity,” Journal of Business and Economic Statistics 23: 432-442.
Taylor, A.M., 2001, “Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price,” Econometrica 69, 473-498.
Taylor, A.M., 2002, “A Century of Purchasing Power Parity,” The Review of Economics and Statistics 84, 139-150.
Available Versions of this Item
- Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle. (deposited 25. Oct 2010 07:54) [Currently Displayed]