Purchasing Power Parity Adjustment Speeds in High Frequency Data When the Equilibrium Real Exchange Rate is Proxied by a Deterministic Trend

Rogoff suggested in 1996 that the dollar-yen real exchange rate represented a 'canonical' case of a trend in the equilibrium real exchange rate. The implied speed of adjustment of the dollar-yen real exchange rate is found to be substantially faster, with half-life shocks of less than 2 years, from estimates of a non-linear model which incorporates a deterministic trend proxying the equilibrium level. We also examine the power of unit root tests against smooth transition non-linear models which incorporate a deterministic trend and the robustness of such non-linear estimations using Monte Carlo and bootstrap simulations