We use a long series of monthly data that spans over 100 years to examine the dynamics of US ex-post and ex-ante real interest rates. The principal tenet of this study is that the data are not consistent with a unit root in real interest rates, although shocks impinging upon these rates are rather persistent. In addition, our results highlight the importance of modeling long memory not only in the conditional mean but in the power transformed conditional variance as well. Overall, these …ndings suggest that much more attention needs to be paid to the degree of persistence and its consequences for the economic theories which are still inconsistent with the …nding of either near-unit-root or long memory mean-reverting behavior.

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This study presents additional evidence on the convergence speeds of real exchange rates. Using median unbiased estimation, impulse response analysis and long horizon data sampled annually and monthly, we estimate the speeds at which deviations from purchasing power parity (PPP) die out. Both monthly and annual data have been used since temporal aggregation has been proposed as a possible cause of the implausibly large half-lives reported in the literature. Moreover, since reporting only point estimates provides an incomplete picture of the speed of convergence towards PPP, median unbiased confidence intervals are also estimated. The results show that the confidence intervals for the half-lives are typically very wide. Interestingly, however, the intervals estimated using monthly data are tighter than those estimated with annual data, though, they do not help solve the PPP puzzle. In fact, it appears that the point estimates of the half-lives obtained with monthly data are much larger. Therefore, on the basis of the evidence reported in this study, the results on temporal aggregation by Taylor (2001) are unlikely to have a major role in empirically explaining the PPP puzzle.