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2016•DEStech Transactions on Economics Business and ManagementRequires access

Parity Reversion of Absolute Purchasing Power Parity

Zhi-bai ZHANG, Zhicun Bian

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Abstract

In this paper, we study the parity reversion 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 in relative PPP. Thus, the parity reversion of absolute PPP may be very different from that of relative PPP.

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What this paper is about

In this paper, we study the parity reversion 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 in relative PPP. Thus, the parity reversion of absolute PPP may be very different from that of relative PPP.

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Available abstract

In this paper, we study the parity reversion 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 in relative PPP. Thus, the parity reversion of absolute PPP may be very different from that of relative PPP.

Key concepts: Purchasing power parity, Relative purchasing power parity, Mean reversion, Parity (physics), Unit root, Reversion, Econometrics, Economics

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