Multi-Country Evidence on the Behavior of Purchasing Power Parity Under the Current Float
17 Pages Posted: 7 Nov 2004
Using panel data for the United States and 22 other OECD countries for the current float, this paper presents evidence that despite substantial short-term perturbations, purchasing power parity actually performed much better than commonly believed. Average rates of growth of real exchange rates over long horizons bear little relationship either to average rates of growth of nominal exchange rates or to average inflation differentials, thus implying a close to one-to-one relation between average rates of growth of nominal exchange rates and average inflation differentials. Panel-data variants of standard unit-root tests suggest that the real exchange rates of these countries can be characterized as mean-reverting.
JEL Classification: F31
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