Purchasing Power Parity and the Taylor Rule

Hyeongwoo Kim, Ippei Fujiwara, Bruce E. Hansen, Masao Ogaki

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

It is well known that there is a large degree of uncertainty around Rogoff's 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 non-parametric 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 3-5 years, with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than 1 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.

Original languageEnglish
Pages (from-to)874-903
Number of pages30
JournalJournal of Applied Econometrics
Volume30
Issue number6
DOIs
Publication statusPublished - 2015 Sep 1

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ASJC Scopus subject areas

  • Economics and Econometrics
  • Social Sciences (miscellaneous)

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