Improving the measurement of real exchange rate persistence

This dissertation addresses the Purchasing Power Parity inquiry by focusing on the existence, the persistence and the evolution of PPP.; Panel unit root tests with GLS-detrending with an application to purchasing power parity. We extend the GLS-detrending procedure of Elliott, Rothenberg and Stock (1996) to a panel Augmented Dickey-Fuller test. Via a Monte Carlo experiment, we are able to show that our new panel unit root test has higher power than existing panel unit root tests. The new test is applied to a data set where existing panel and univariate unit root tests have demonstrated limited ability to reject the unit root null hypothesis. That is, we investigate the topic of PPP for the post Bretton-Woods period, and obtain strong rejections of the unit root test hypothesis using our new test.; State of the art unit root tests and the PPP puzzle. We extend median-unbiased estimation to the efficient unit root test of Elliott, Rothenberg, and Stock (1996). We find that median-unbiased estimation based on the more powerful unit root test has the potential to tighten confidence intervals for half-lives. Using long horizon real exchange rate data, we find that the typical lower bound of the confidence intervals for median-unbiased half-lives is above 3 years. Thus, while previous confidence intervals for half-lives are consistent with virtually anything, our tighter confidence intervals now rule out economic models with nominal rigidities as candidates for explaining the observed behavior of real exchange rates.; Convergence to purchasing power parity at the commencement of the Euro. We investigate convergence towards PPP within the Euro Zone and between the Euro Zone and its main partners using panel data methods that incorporate serial and contemporaneous correlation. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the Euro Zone for different numeraire currencies, as well as in the Euro Zone plus the United States, with the US dollar as the numeraire currency, starting between 1996 and 1999. The process of convergence towards PPP, however, begins earlier, generally in 1992 or 1993 following the adoption of the Maastricht Treaty.