A century of purchasing power parity confirmed: The role of nonlinearity
AbstractTaylor (2002) claims that Purchasing Power Parity (PPP) has held over the 20th century based on strong evidence of stationary for century-long real exchange rates for 20 countries. Lopez etÂ al. (2005), however, found much weaker evidence of PPP with alternative lag selection methods. We reevaluate Taylor's claim by implementing a recently developed nonlinear unit root test by Park and Shintani (2005). We find strong evidence of nonlinear mean-reversion in real exchange rates that confirms Taylor's claim. We also find a possible misspecification problem in using the ESTAR model that may not be detected with Taylor-approximation based tests.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 29 (2010)
Issue (Month): 7 (November)
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Web page: http://www.elsevier.com/locate/inca/30443
Purchasing power parity Transition autoregressive process Inf-t unit root test;
Other versions of this item:
- Kim, Hyeongwoo & Moh, Young-Kyu, 2009. "A Century of Purchasing Power Parity Confirmed: The Role of Nonlinearity," MPRA Paper 17488, University Library of Munich, Germany.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
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