Convergence of absolute purchasing power parity

Zhang, Zhibai (2015): Convergence of absolute purchasing power parity.

Abstract

In this paper, we study the convergence of 40 main bilateral real exchange rates (RERs) constructed by actual price levels to be consistent with absolute purchasing power parity (PPP), rather than by price indexes as used in popular studies. The time series ADF and KPSS unit root tests reveal that 39 RERs are stationary in their periods of about 60 years or less. The half-lives span from 1 to 40 years and are mostly outside of the consensus range of 3–5 years. Some cases suggest that the half-life may be not an appropriate method for measuring the convergence of absolute PPP. In contrast, some statistic indexes (e.g., root mean squared error) can be applied for this use and may have more power than the half-life.

• Item Type: MPRA Paper
• Language: English
• Keywords: absolute purchasing power parity; real exchange rate; convergence; half-life
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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