Recent tests using long data series find evidence in favor of long-run PPP. These tests may have reached the wrong conclusion. Using artificial data calibrated to nominal exchange rates and disaggregated data on prices, we show that tests on long-run PPP have serious size biases. In the baseline...

Recent tests using long data series find evidence in favor of long-run PPP (by rejecting either the null hypothesis of unit roots in real exchange rates or the null of no cointegration between nominal exchange rates and relative prices.) These tests may have reached the wrong conclusion. Monte...

We investigate the behavior of the long-run U.S./U.K. real exchange rate from 1885 to 1995. Our long-run real exchange rate series is derived from an unobserved components model which divides the real exchange rate into permanent and transitory components. The transitory component is modeled as...

The paper estimates a model for the real U.S./U.K. exchange rate. The Kalman filter is used to identify a permanent and transitory component. We find the variance of the transitory component shifts among three states according to a Markov-switching process. The model is estimated by Gibbs...

Recent tests using long data series find evidence in favor of long-run PPP (by rejecting either the null hypothesis of unit roots in real exchange rates or the null of no cointegration between nominal exchange rates and relative prices.) These tests may have reached the wrong conclusion. Monte...