The purchasing power parity persistence paradigm

Rogoff (Journal of Economic Literature 1996;34:647-668) describes the 'rema rkable consensus' of 3-5 year half-lives of purchasing power parity deviati ons among studies using long-horizon data. These studies, however, focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence. Our half-life estimates explicitly acco unt for serial correlation, sampling uncertainty and, most importantly, sma ll sample bias. Calculating confidence intervals as well as point estimates for long-horizon and post-1973 data, we find that, even though most of the point estimates lie within the 3-5 year range, univariate methods provide virtually no information regarding the size of the half-lives. (C) 2002 Els evier Science B.V. All rights reserved.