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Home bias and the persistence of real exchange rates

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  • Chen, Show-Lin
  • Wu, Jyh-Lin

Abstract

This paper investigates the half-life of real exchange rates after taking into account the impact of home bias. Empirical results indicate that the half-life of real exchange rates is in the range of 1.5 to 2years for four out of five countries after controlling the impact of home bias. These results support Obstfeld and Rogoff's (2000, NBER Macroeconomics Annual) view that home bias is crucial in explaining the PPP puzzle.

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  • Chen, Show-Lin & Wu, Jyh-Lin, 2011. "Home bias and the persistence of real exchange rates," Economic Modelling, Elsevier, vol. 28(1), pages 55-59.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:55-59
    DOI: 10.1016/j.econmod.2010.09.025
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    Cited by:

    1. Meher Manzur, 2018. "Exchange rate economics is always and everywhere controversial," Applied Economics, Taylor & Francis Journals, vol. 50(3), pages 216-232, January.
    2. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Hamzah, Nor Aishah, 2013. "Parity reversion in real interest rate in the Asian countries: Further evidence based on local-persistent model," Economic Modelling, Elsevier, vol. 35(C), pages 634-642.
    3. Habib, Maurizio Michael & Mileva, Elitza & Stracca, Livio, 2017. "The real exchange rate and economic growth: Revisiting the case using external instruments," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 386-398.
    4. Ogrokhina, Olena, 2019. "Persistence of prices in the Eurozone capital cities: Evidence from the Economist Intelligence Unit City Data," Economic Modelling, Elsevier, vol. 76(C), pages 330-338.
    5. Socaciu, Erzsébet-Mirjám & Nagy, Bálint-Zsolt & Benedek, Botond, 2023. "No place like home: Home bias and flight-to-quality in Group of Seven countries," Economic Modelling, Elsevier, vol. 129(C).

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    More about this item

    Keywords

    Home bias; Real exchange rates; Half-life; Local projections;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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