Stats › Currencies and commodities › PPP
One PPP half-life estimate ranges from 3.72 to 34.31 years
| Study | Data | Sample | Half-life | Confidence interval |
|---|---|---|---|---|
| Cumby, McParity | Big Mac prices | About a decade to 1996 | About 1 year | Not stated |
| Lothian and Taylor, franc-pound | Franc-sterling real rate | 1803 to 1990 | 2.5 years | Not stated |
| Abuaf and Jorion | Eight currencies | 1901 to 1972 | 3.3 years | Not stated |
| Lothian and Taylor, dollar-pound | Dollar-sterling real rate | 1791 to 1990 | 4.7 years | Not stated |
| Rogoff's stated consensus | Survey of the above and others | Various | 3 to 5 years | Not applicable |
| Murray and Papell, median-unbiased AR(1) | Dollar-sterling real rate | 1791 to 1990 | 6.58 years | 3.72 to 34.31 years |
| Murray and Papell, ADF with 7 lags | Dollar-sterling real rate | 1791 to 1990 | 16.98 years from alpha | Infinite upper bound |
Sources: Rogoff, The Purchasing Power Parity Puzzle, Journal of Economic Literature 1996, for the consensus statement and the Abuaf and Jorion and Lothian and Taylor estimates as he reports them. Murray and Papell, The Purchasing Power Parity Puzzle is Worse Than You Think, Empirical Economics. Cumby, NBER working paper 5675, 1996. Half-lives are not comparable across studies: different price indices, frequencies, currencies and estimators.
Purchasing power parity says a basket of goods should cost the same everywhere at the exchange rate. Deviations take three to five years to halve, and one published confidence interval runs to 34.31 years. The theory is probably true and certainly untradeable.
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