Abstract:
This paper utilises various recently developed econometric methods to obtain better
approximations to the half-life for real exchange rates of ten South African
Development Community (SADC) countries and to generate confidence intervals
for half-life deviations from the purchasing power parity (PPP). The robust methods
of Stock (1991), Elliott and Stock (2001), and Hansen (1999) imply that point
estimates of less than 36 months exist, making them compatible with PPP. However,
the results of ADF and ADF-GLS tests render the SADC real exchange rates as
nonstationary processes, a result that is patently at odds with mean-reversion,
implying at the same time the possibility of infinite half-lives. Therefore the
empirical results appearing in this paper do not convincingly resolve the half-life
version of the PPP puzzle and leaves room for future research in the directions of
non-parametric methods and median unbiased confidence intervals.
