Showing papers by "Hélène Rey published in 2003"
TL;DR: This article showed that established time-series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices, and showed that corrected estimates are consistent with plausible nominal rigidities, thus solving the PPP puzzle.
Abstract: We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that established time-series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices. When heterogeneity is properly taken into account, estimates of the real exchange rate half-life fall dramatically, to little more than one year, or significantly below Rogoff's "consensus view" of three to five years. We show that corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the PPP puzzle.
84 citations
TL;DR: In this article, the authors confirm the presence of substantial nonlinearities in real exchange rate dynamics at the sectoral level and compute the speed of mean reversion of sector specific real exchange rates, conditional on the existence of arbitrage.
Abstract: We confirm the presence of substantial nonlinearities in real exchange rate dynamics at the sectoral level. There exists zones where arbitrage is not profitable because of transaction costs, and thus mean reversion is inexistent. We compute the speed of mean reversion of sector specific real exchange rates, conditional on the existence of arbitrage as implied by our nonlinear estimations, and relate them to plausible economic determinants such as tradability and exchange rate volatility.
80 citations
Posted Content•
TL;DR: The authors showed that established time-series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices, and showed that corrected estimates are consistent with plausible nominal rigidities, thus solving the PPP puzzle.
Abstract: We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that established time-series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices. When heterogeneity is properly taken into account, estimates of the real exchange rate half-life fall dramatically - to little more than one year - or significantly below Rogoff’s ‘consensus view’ of three to five years. We show that corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the PPP puzzle.
23 citations
Posted Content•
TL;DR: In this article, the authors confirm the presence of substantial nonlinearities in real exchange rate dynamics at the sectoral level and compute the speed of mean reversion of sector specific real exchange rates, conditional on the existence of arbitrage.
Abstract: We confirm the presence of substantial nonlinearities in real exchange rate dynamics at the sectoral level. There exists zones where arbitrage is not profitable because of transaction costs, and thus mean reversion is inexistent. We compute the speed of mean reversion of sector specific real exchange rates, conditional on the existence of arbitrage as implied by our nonlinear estimations, and relate them to plausible economic determinants such as tradability and exchange rate volatility.
21 citations