Purchasing Power Parity and Breaking Trend Functions in the Real Exchange Rate
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
This paper provides evidence of long run purchasing power parity by performing a recently developed method to test for unit roots in the presence of structural breaks. Data consist of real exchange rate series for 20 countries including developed and developing economies. Structural breaks are detected in 18 countries and real exchange rates are found to be stationary in all countries except Japan. Estimated linear trends are the result of cross-country total factor productivity differentials between tradable and nontradable sectors. Estimated breaks correspond to large and permanent total factor productivity shocks associated with historical events like wars, structural reforms or deep economic recessions. An exercise with total factor productivity data shows that the Balassa-Samuelson effect explains the estimated long run trends in most countries.
La serie Borradores de Economía es una publicación de la Subgerencia de Estudios Económicos del Banco de la República. Los trabajos son de carácter provisional, las opiniones y posibles errores son responsabilidad exclusiva del autor y sus contenidos no comprometen al Banco de la República ni a su Junta Directiva.
