Purchasing Power Parity and Structural Breaks: Rolling, Recursive and Sequential Regressions

Abstract

Innovative rolling, recursive and sequential regression procedures areemployed to examine the evidence concerning purchasing power parity. Two data sets areexamined: monthly U.S.-based real exchange rates from 1957-1998 and annual U.K.-based real exchange rates from 1900-1998. Empirical evidence is found for purchasingpower parity when structural breaks are included in the annual bilateral exchange rates.Evidence of purchasing power parity and structural breaks is weaker using the monthlydata (F3).