The Harrod-Balassa-Samuelson Hypothesis: Real Exchange Rates and their Long-Run Equilibrium / Yanping Chong, Òscar Jordà, Alan M. Taylor.

Format:

Book

Author/Creator:

Chong, Yanping.

Contributor:

National Bureau of Economic Research.

Jordà, Òscar.

Taylor, Alan M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15868.

NBER working paper series no. w15868

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Harrod-Balassa-Samuelson Hypothesis

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

Frictionless, perfectly competitive traded-goods markets justify thinking of purchasing power parity (PPP) as the main driver of exchange rates in the long-run. But differences in the traded/non-traded sectors of economies tend to be persistent and affect movements in local price levels in ways that upset the PPP balance (the underpinning of the Harrod-Balassa-Samuelson hypothesis, HBS). This paper uses panel-data techniques on a broad collection of countries to investigate the long-run properties of the PPP/HBS equilibrium using novel local projection methods for cointegrated systems. These semi-parametric methods isolate the long-run behavior of the data from contaminating factors such as frictions not explicitly modelled and thought to have effects only in the short-run. Absent the short-run effects, we find that the estimated speed of reversion to long-run equilibrium is much higher. In addition, the HBS effects means that the real exchange rate is converging not to a steady mean, but to a slowly to a moving target. The common failure to properly model this effect also biases the estimated speed of reversion downwards. Thus, the so-called "PPP puzzle" is not as bad as we thought.

Notes:

Print version record

April 2010.