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Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era

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  • Baum, Christopher F.
  • Barkoulas, John T.
  • Caglayan, Mustafa

Abstract

This paper models the dynamics of adjustment to long-run purchasing power parity (PPP) over the post-Bretton Woods period in a nonlinear framework consistent with the presence of frictions in international trade. We estimate exponential smooth transition autoregressive (ESTAR) models of deviations from PPP using both CPI- and WPI-based measures for a broad set of U.S. trading partners. We find clear evidence of a mean-reverting dynamic process for sizable deviations from PPP, with an equilibrium tendency varying nonlinearly with the magnitude of disequilibrium.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 20 (2001)
Issue (Month): 3 (June)
Pages: 379-399

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Handle: RePEc:eee:jimfin:v:20:y:2001:i:3:p:379-399

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Web page: http://www.elsevier.com/locate/inca/30443

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