2604.01132 The Purchasing-Power Parity Residual Decomposition: Bootstrap Prediction Intervals Reveal Systematic Currency Misalignment in 12 Commodity-Exporting Economies
Purchasing-power parity (PPP) models commonly predict real effective exchange rates (REER) using variables derived from price-level comparisons, creating a methodological circularity that inflates goodness-of-fit. We introduce the PPP Residual Decomposition (PPP-RD), a two-stage framework that (1) predicts REER using four strictly non-circular macroeconomic fundamentals (trade openness, commodity export share, institutional quality, and inflation differential) via gradient boosted trees, and (2) decomposes prediction residuals into structural and cyclical components using wavelet time-frequency separation.