Ja. Frankel et Ak. Rose, A PANEL PROJECT ON PURCHASING POWER PARITY - MEAN REVERSION WITHIN AND BETWEEN COUNTRIES, Journal of international economics, 40(1-2), 1996, pp. 209-224
Previous time-series studies have shown evidence of mean-reversion in
real exchange rates. Deviations from purchasing power parity (PPP) app
ear to have half-lives of approximately four years. However, the long
samples required for statistical significance are unavailable for most
currencies, and are potentially inappropriate because of regime chang
es. In this study, we re-examine deviations from PPP using a panel of
150 countries and 45 annual post WWII observations. Our panel shows st
rong evidence of mean-reversion that is similar to that from long time
-series. PPP deviations are eroded at a rate of approximately 15% annu
ally, i.e., their half-life is around four years. Such findings can be
masked in time-series data, but are relatively easy to find in cross-
sections.