TY  - JOUR
AU  - Chong,Yanping
AU  - Jordà,Òscar
AU  - Taylor,Alan M.
TI  - The Harrod-Balassa-Samuelson Hypothesis: Real Exchange Rates and their Long-Run Equilibrium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15868
PY  - 2010
Y2  - April 2010
UR  - http://www.nber.org/papers/w15868
L1  - http://www.nber.org/papers/w15868.pdf
N1  - Author contact info:
Yanping Chong
UC, Davis
E-Mail: ypchong@ucdavis.edu

Òscar Jordà
Economic Research, MS 1130
Federal Reserve Bank of San Francisco
101 Market St.
San Francisco, CA 94105
E-Mail: oscar.jorda@sf.frb.org

Alan M. Taylor
Department of Economics
University of Virginia
Monroe Hall
Charlottesville, VA 22903
Fax: (434) 982-2904
E-Mail: alan.m.taylor@virginia.edu
AB  - Frictionless, perfectly competitive traded-goods markets justify thinking of purchasing power parity (PPP) as the main driver of exchange rates in the long-run. But differences in the traded/non-traded sectors of economies tend to be persistent and affect movements in local price levels in ways that upset the PPP balance (the underpinning of the Harrod-Balassa-Samuelson hypothesis, HBS). This paper uses panel-data techniques on a broad collection of countries to investigate the long-run properties of the PPP/HBS equilibrium using novel local projection methods for cointegrated systems. These semi-parametric methods isolate the long-run behavior of the data from contaminating factors such as frictions not explicitly modelled and thought to have effects only in the short-run. Absent the short-run effects, we find that the estimated speed of reversion to long-run equilibrium is much higher. In addition, the HBS effects means that the real exchange rate is converging not to a steady mean, but to a slowly to a moving target. The common failure to properly model this effect also biases the estimated speed of reversion downwards. Thus, the so-called "PPP puzzle" is not as bad as we thought.
ER  -