Munich Personal RePEc Archive

Is the real effective exchange rate biased against the PPP hypothesis?

Ventosa-Santaulària, Daniel and Wallace, Frederick and Gómez-Zaldívar, Manuel (2012): Is the real effective exchange rate biased against the PPP hypothesis?

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Abstract

We show that the use of the real effective exchange rate to test for purchasing power parity, as in Astorga (2012) and other studies, introduces a bias against finding evidence of PPP. The bias is illustrated using unit root tests applied to bilateral real rates.

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