Chang, Ming Jen and Lin, Chang Ching and Yin, Shou-Yung (2011): The behavior of real exchange rates: the case of Japan.
Download (135kB) | Preview
The study examines the convergence rate of mean reversion by contrasting the estimated half-life of real exchange rate (RER). We employ an extensive monthly consumer price index (CPI)-based product price’s panel for Japan (the U.S. as the num´eraire). We find that the disaggregated RERs are persistent due to the cross-sectional dependence problems. By controlling common correlated effects, the estimated half-life for all goods may fall to as low as 2.54 years, below the consensus view of 3 to 5 years summarized by Rogoff (1996). After correcting the small-sample bias, the estimated half-life of deviations from purchasing power parity (PPP) increase by 1.03 year. Our findings also support that the half-life of mean reversion of RER is about 3.55 years for traded goods, about 0.11 year lower than non-traded goods. We also show that traded goods and non-traded goods perform distinct distributions of persistence.
|Item Type:||MPRA Paper|
|Original Title:||The behavior of real exchange rates: the case of Japan|
|Keywords:||Common correlated effect; cross-sectional dependence; purchasing power parity; real exchange rate; traded and non-traded goods|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Shou Yung Yin|
|Date Deposited:||17. Dec 2011 17:06|
|Last Modified:||28. Feb 2013 02:06|
 Anderson, T.W., 1962. On the distribution of the two-sample Cram´er-von Mises criterion. The Annals of Mathematical Statistics 33, 1148–1159.
 Arellano, M. and S. Bond, 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58, 277–297.
 Burstein, A.T., J.C. Neves and S. Rebelo, 2003. Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations. Journal of Monetary Economics 50, 1189–1214.
 Boivin, J., M.P. Giannoni, and I. Mihov, 2009. Sticky prices and monetary policy: Evidence from disaggregated US data. American Economic Review 99:1, 350–384.
 Chen, S.-S., and C. Engel, 2005. Does‘aggregation bias’explain the PPP puzzle?. Pacific Economic Review 10, 49–72.
 Cheung, Y.-W. and E. Fujii, 2008. Deviations from the law of one price in Japan. CESifo working paper No. 2275.
 Choi, C.-Y., N.C. Mark and D. Sul, 2006. Unbiased estimation of the half-life to PPP convergence in panel data. Journal of Money, Credit and Banking 38, 921–938.
 Crucini, M.J. and M. Shintani, 2008. Persistence in law of one price deviations: Evidence from micro-data. Journal of Monetary Economics 55, 629–644.
 Engel, C., 1999. Accounting for US real exchange rate changes. Journal of Political Economy 107, 507–538.
 Esaka, T., 2003. Panel unit root tests of purchasing power parity between Japanese cities, 1960-1988: disggregated price data. Japan and the World Economy 15, 233–244.
 Frees, E.W., 1995. Assessing cross sectional correlation in panel data. Journal of Econometrics 69, 393–414.
 Gadea, M.D. and L. Mayoral, 2009. Aggregation is not the solution: the PPP puzzle strikes back. Journal of Applied Econometrics 24, 875–894.
 Hausman, J.A., 1978. Specification tests in econometrics. Econometrica 46, 1251–1271.
 Imbs, J., H. Mumtaz, M.O. Ravn and H. Rey, 2005. PPP strikes back: Aggregation and the real exchange rate. Quarterly Journal of Economics 120, 1–43.
 Murray, C.J. and D.H. Papell, 2005. Do panels help solve the purchasing power parity puzzle?. Journal of Business and Economic Statistics 23, 410–415.
 Nagayasu, J. and N. Inakura, 2009. PPP: Further evidence from Japanese regional data. International Reviews of Economics and Finance 18, 419–427.
 Parsley, D. and S.-J. Wei, 2007. A prism into the PPP puzzles: The micro-foundations of Big Mac real exchange rates. Economic Journal 117, 1336–1356.
 Pesaran, M.H. 2006. Estimation and inference in large heterogeneous panels with cross section dependence. Econometrica 74, 967–1012.
 Pesaran, M.H. and R. Smith, 1995. Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics 68, 79–113.
 Robertson, R., A. Kumar and D.H. Dutkowsky, 2009. Purchasing power parity and aggregation bias for a developing country: The case of Mexico. Journal of Development Economics 90, 237–243.
 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.
 Wilcoxon, F., 1945. Individual comparisons by ranking methods. Biometrics Bulletin 1,