School of Economics and Finance

No. 522: How Puzzling is the PPP Puzzle? An Alternative Half-Life Measure of Convergence to PPP

Georgios Chortareas , University of Essex
George Kapetanios , Queen Mary, University of London

October 1, 2004

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The lengthy half-lives of real exchange rates in the presence of high degree of exchange rate volatility has been considered as one of the most puzzling empirical regularities in international macroeconomics. This paper suggests that the measure of half-life used in the literature might be problematic and suggests an alternative measure. Empirical analysis suggests that use of the new measure may shed light on the PPP puzzle.

J.E.L classification codes: C12, C15, C23

Keywords:PPP, Half life, Real exchange rates