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A Nonparametric Measure of Convergence Toward Purchasing Power Parity

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  • Mototsugu Shintani

Abstract

It has been claimed that the deviations from purchasing power parity are highly persistent and have quite long half-lives under the assumption of a linear adjustment of real exchange rates. However, inspired by trade cost models, nonlinear adjustment has been widely employed in recent empirical studies. This paper proposes a simple nonparametric procedure for evaluating the speed of adjustment in the presence of nonlinearity, using the largest Lyapunov exponent of the time series. The empirical result suggests that the speed of convergence to a long-run price level is indeed faster than what was found in previous studies with linear restrictions. Copyright © 2006 John Wiley & Sons, Ltd.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000172.

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Date of creation: 24 Jan 2003
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Handle: RePEc:cla:levarc:506439000000000172

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Cited by:
  1. Choi, Chi-Young & Matsubara, Kiyoshi, 2007. "Heterogeneity in the persistence of relative prices: What do the Japanese cities tell us?," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 260-286, June.
  2. Baharumshah, Ahmad Zubaidi & Chan, Tze-Haw & Aggarwal, Raj, 2006. "The Changing Dynamics of the East Asian Real Exchange Rates after the Financial Crisis: Further Evidence on Mean Reversion," MPRA Paper 6090, University Library of Munich, Germany, revised 22 Nov 2007.
  3. Bask, Mikael & Widerberg, Anna, 2009. "Market structure and the stability and volatility of electricity prices," Energy Economics, Elsevier, Elsevier, vol. 31(2), pages 278-288, March.
  4. David E. Giles & Chad N. Stroomer, 2005. "Does Trade Openness Affect the Speed of Output Convergence? Some Empirical Evidence," Econometrics Working Papers, Department of Economics, University of Victoria 0509, Department of Economics, University of Victoria.
  5. Deockhyun Ryu & Mahmoud A. El-Gamal, 2004. "Short Memory and the PPP-puzzle," Econometric Society 2004 Far Eastern Meetings, Econometric Society 577, Econometric Society.
  6. El-Gamal, Mahmoud A. & Ryu, Deockhyun, 2006. "Short-memory and the PPP hypothesis," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(3), pages 361-391, March.
  7. Bask, Mikael, 2010. "Measuring potential market risk," Journal of Financial Stability, Elsevier, Elsevier, vol. 6(3), pages 180-186, September.
  8. Dimitrios Malliaropulos & Ekaterini Panopoulou & Theologos Pantelidis & Nikitas Pittis, 2013. "Decomposing the persistence of real exchange rates," Empirical Economics, Springer, Springer, vol. 44(3), pages 1217-1242, June.
  9. Baharumshah, Ahmad Zubaidi & Aggarwal, Raj & Chan, Tze-Haw, 2005. "East Asian Real Exchange Rates and PPP: New Evidence from panel-data tests," MPRA Paper 2023, University Library of Munich, Germany, revised 2007.
  10. Bask, Mikael & Widerberg, Anna, 2007. "The Stability and Volatility of Electricity Prices: An Illustration of (lambda, sigma-2) Analysis," Working Papers in Economics, University of Gothenburg, Department of Economics 267, University of Gothenburg, Department of Economics.
  11. Hyeongwoo Kim & Deockhyun Ryu, 2013. "Measuring the Speed of Convergence of Stock Prices: A Nonparametric and Nonlinear Approach," Auburn Economics Working Paper Series, Department of Economics, Auburn University auwp2013-06, Department of Economics, Auburn University.
  12. Hyeongwoo Kim & Deockhyun Ryu, 2013. "A Nonparametric Study of Real Exchange Rate Persistence over a Century," Auburn Economics Working Paper Series, Department of Economics, Auburn University auwp2013-08, Department of Economics, Auburn University.
  13. Chan, Tze-Haw & Chong, Lee Lee & Khong, Wye Leong Roy, 2008. "Real Exchange Rate Behavior: New Evidence with Linear and Non-linear Endogenous Break(s)," MPRA Paper 3406, University Library of Munich, Germany.
  14. Parhi, Mamata & Diebolt, Claude & Mishra, Tapas & Gupta, Prashant, 2013. "Convergence dynamics of output: Do stochastic shocks and social polarization matter?," Economic Modelling, Elsevier, Elsevier, vol. 30(C), pages 42-51.

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