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Purchasing Power Parity and the Real Exchange Rate in Bangladesh: A Nonlinear Analysis

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  • Ibrahim Chowdhury

Abstract

The long-run purchasing power parity (PPP) hypothesis is examined using data for Bangladesh and its major trading partners - the US, Euro area, Japan and India - during the period 1994 to 2002. We apply recently developed nonlinear econometric techniques and provide strong evidence for highly nonlinear meanreversion of real bilateral Bangladesh taka exchange rates toward a stable long-run equilibrium. Our findings imply strong support for the validity of long-run PPP as well as for the theoretical models which predict nonlinear adjustment in real exchange rates.

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Bibliographic Info

Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 14.

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Date of creation: 21 Oct 2004
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Handle: RePEc:kls:series:0014

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Keywords: real exchange rate; purchasing power parity; nonlinearity;

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