Abstract
A flexible semi-parametric augmented Dickey Fuller (ADF) regression is proposed to explore real exchange rate dynamics for 16 countries over the twentieth century, and to estimate half-lives. Departing from existing literature, the present approach does not impose a functional form of the ADF regression and encompasses parametric extensions. Significant impediments to real exchange rates adjustment are found, and estimated half-lives are longer than those reported by earlier studies. These findings reveal a dismal PPP performance, difficulties in designing profitable strategies based on mean-reversion, complexities in production relocation policies by firms to reduce exchange rate risk, and carry implications for foreign subsidiary ownership structure.
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