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The study examines the convergence rate of mean reversion by contrasting the estimated half-life of real exchange rate RER. We employ an extensive monthly consumer price index CPI-based product price’s panel for Japan the U.S. as the numeraire. We find that the disaggregated RERs are persistent due to the cross-sectional dependence problems. By controlling common correlated effects, the estimated half-life for all goods may fall to as low as 2.54 years, below the consensus view of 3 to 5 years summarized by Rogoff 1996. After correcting the small-sample bias, the estimated half-life of deviations from purchasing power parity PPP increase by 1.03 year. Our findings also support that the half-life of mean reversion of RER is about 3.55 years for traded goods, about 0.11 year lower than non-traded goods. We also show that traded goods and non-traded goods perform distinct distributions of persistence.

Item Type: MPRA Paper -

Original Title: The behavior of real exchange rates: the case of Japan-

Language: English-

Keywords: Common correlated effect; cross-sectional dependence; purchasing power parity; real exchange rate; traded and non-traded goods-

Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal ModelsF - International Economics > F3 - International Finance > F31 - Foreign Exchange-

Author: Chang, Ming Jen


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