Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits / Shang-Jin Wei, David C. Parsley.

Format:

Book

Author/Creator:

Wei, Shang-Jin.

Contributor:

National Bureau of Economic Research.

Parsley, David C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5032.

NBER working paper series no. w5032

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Purchasing Power Disparity During the Floating Rate Period

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1995.

Summary:

Using a panel of 12 tradable sectors in 91 OECD country pairs (14 countries), we study the deviations from the purchasing power parity during the recent floating exchange rate period. (1) We find some evidence that the deviations are positively related to exchange rate volatility as well as to transportation costs. (2) Once we have controlled for these two factors, free trade areas such as the EC and the EFTA do not seem to reduce significantly the deviations from PPP relative to other OECD countries. (3) Although only using the post- 1973 data, we are able to find strong evidence of mean reversion towards PPP. The estimated half lives of the deviation from PPP are about four years and three quarters for the non-EMS countries in the sample, and four years and one quarter for the EMS countries. (4) We find evidence of non-linearity in the rate of mean reversion: the convergence occurs faster for country pairs with larger initial deviations.

Notes:

Print version record

February 1995.