Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment

Kim, Hyeongwoo and Moh, Young-Kyu (2010): Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment.

Abstract

This paper revisits the empirical evidence of purchasing power parity under the current float by the recursive mean adjustment (RMA) method (So and Shin, 1999). We first demonstrate superior finite sample performance of the RMA-based unit root test over the augmented Dickey-Fuller test via Monte Carlo experiments for 18 linear and nonlinear autoregressive data generating processes. The RMA-based unit root test rejects the null hypothesis of unit root for 16 out of 20 current float real exchange rates relative to the US dollar.We also find that the computationally simple RMA-based asymptotic confidence interval can provide useful information regarding the half-life of the real exchange rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: Recursive Mean Adjustment; Finite Sample Performance; Purchasing Power Parity; Half-Life
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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