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Cerrato, Mario, Kellard, Neil and Sarantis, Nicholas (2007) The purchasing power parity persistence paradigm in emerging markets. Centre for International Capital Markets discussion papers, 2007 (07). pp. 1-32. ISSN 1749-3412
This paper analyses the PPP persistence puzzle using a unique data set of black market real exchange rates for 36 emerging market economies. In estimating PPP half-lives, the problems of small sample bias and serial correlation are addressed by using (exact and approximate) median unbiased univariate and panel estimation methods. We construct bootstrap confidence intervals for the half-lives, as well as exact quantiles of the median function for different significance levels using Monte Carlo simulation. From the more powerful panel results, a new dichotomy emerges. Even after accounting for a number of econometric issues, the PPP persistence puzzle is still a striking characteristic of the majority of emerging market countries. However, in a minority of exchange rates, the PPP puzzle is removed. The rationale for this duality is posited as an interesting question for future research.
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