Chang, Ming Jen and Lin, Chang Ching and Yin, Shou-Yung (2011): The behavior of real exchange rates: the case of Japan.
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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 - Panel Data Models ; Spatio-temporal Models
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|
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