Quantifying the uncertainty about the half-life of deviations from PPP
Article first published online: 1 FEB 2002
Copyright © 2002 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 17, Issue 2, pages 107–125, March/April 2002
How to Cite
Kilian, L. and Zha, T. (2002), Quantifying the uncertainty about the half-life of deviations from PPP. J. Appl. Econ., 17: 107–125. doi: 10.1002/jae.621
- Issue published online: 18 APR 2002
- Article first published online: 1 FEB 2002
- Manuscript Revised: 3 APR 2001
- Manuscript Received: 18 NOV 1999
We propose a Bayesian framework in which the uncertainty about the half-life of deviations from purchasing power parity can be quantified. Based on the responses to a survey study, we propose a prior probability distribution for the half-life under the recent float intended to capture widely held views among economists. We derive the posterior probability distribution of the half-life under this consensus prior and confirm the presence of substantial uncertainty about the half-life. We provide for the first time a comprehensive formal evaluation of several nonnested hypotheses of economic interest, including Rogoff's (1996) claim that the half-life is contained in the range of 3 to 5 years. We find that no hypothesis receives strong support from the data. Copyright © 2002 John Wiley & Sons, Ltd.