Purchasing Power Parity and the Taylor Rule

Journal of Applied Econometrics, Vol. 30, No. 6, 2013

AJRC Working Papers No. 05/2013

43 Pages Posted: 26 Jul 2017

See all articles by Hyeongwoo Kim

Hyeongwoo Kim

Auburn University

Ippei Fujiwara

Australian National University (ANU) - Crawford School of Public Policy

Bruce Hansen

University of Wisconsin - Madison - Department of Economics

Masao Ogaki

Keio University

Multiple version iconThere are 3 versions of this paper

Date Written: June 2013

Abstract

It is well-known that there is a large degree of uncertainty around Rogoff’s (1996) consensus half-life of the real exchange rate. To obtain a more efficient estimator, we develop a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. Further, we propose a median unbiased estimator for the system method based on the generalized method of moments with nonparametric grid bootstrap confidence intervals. Applying the method to real exchange rates of 18 developed countries against the US dollar, we find that most half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals. Our Monte Carlo simulation results are consistent with an interpretation of these results that the true half-lives are short but long half-life estimates from single equation methods are caused by the high degree of uncertainty of these methods.

Keywords: Purchasing Power Parity, Taylor Rule, Half-Life of PPP Deviations, Median Unbiased Estimator, Grid-t Confidence Interval

JEL Classification: C32, E52, F31

Suggested Citation

Kim, Hyeongwoo and Fujiwara, Ippei and Hansen, Bruce and Ogaki, Masao, Purchasing Power Parity and the Taylor Rule (June 2013). AJRC Working Papers No. 05/2013. Available at SSRN: https://ssrn.com/abstract=3007454 or http://dx.doi.org/10.2139/ssrn.3007454

Hyeongwoo Kim

Auburn University ( email )

Department of Economics
Auburn, AL 36849
United States
+1-334-844-2928 (Phone)

HOME PAGE: http://https://sites.google.com/site/hkimphd/

Ippei Fujiwara (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building #132 Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

Bruce Hansen

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States

Masao Ogaki

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

Register to save articles to
your library

Register

Paper statistics

Downloads
20
Abstract Views
216
PlumX Metrics