A Panel Project on Purchasing Power Parity: Mean Reversion within and between Countries

20 Pages Posted: 8 Jul 2000 Last revised: 7 Sep 2022

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 1995

Abstract

Previous time-series studies have shown evidence of mean- reversion in real exchange rates. Deviations from purchasing power parity (PPP) appear to have half-lives of approximately four years. However, the long samples required for statistical significance are unavailable for most currencies, and may be inappropriate because of regime changes. In this study, we re-examine deviations from PPP using a panel of 150 countries and 45 annual observations. Our panel shows strong evidence of mean-reversion that is similar to that from long time-series. PPP deviations are eroded at a rate of approximately 15% annually, i.e., their half-life is around four years. Such findings can be masked in time-series data, but are relatively easy to find in cross-sections.

Suggested Citation

Frankel, Jeffrey A. and Rose, Andrew Kenan and Rose, Andrew Kenan, A Panel Project on Purchasing Power Parity: Mean Reversion within and between Countries (February 1995). NBER Working Paper No. w5006, Available at SSRN: https://ssrn.com/abstract=225785

Jeffrey A. Frankel (Contact Author)

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Andrew Kenan Rose

NUS Business School ( email )

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