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Unit Roots, Nonlinear Cointegration and Purchasing Power Parity

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  • Alfred A. Haug

    ()
    (Department of Economics, York University)

  • Syed A. Basher

    ()
    (Department of Economics, York University)

Abstract

We test long¨Crun PPP within a general model of cointegration of linear and nonlinear form. Nonlinear cointegration is tested with rank tests proposed by Breitung (2001). We start with determining the order of integration of each variable in the model, applying relatively powerful DF¨CGLS tests of Elliott, Rothenberg and Stock (1996). Using monthly data from the post¨CBretton Woods era for G¨C10 countries, the evidence leads to a rejection of PPP for almost all countries. In several cases the price variables are driven by permanent shocks that differ from the ones that drive the exchange rate. Also, nonlinear cointegration cannot solve the PPP puzzle.

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File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2003/Haug_Basher_06_2005.pdf
File Function: First version, 2003
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Bibliographic Info

Paper provided by York University, Department of Economics in its series Working Papers with number 2003_1.

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Length: 18 pages
Date of creation: Jan 2003
Date of revision: Jun 2005
Handle: RePEc:yca:wpaper:2003_1

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Keywords: Purchasing power parity; unit roots; nonlinear cointegration;

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References

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  1. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
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  7. Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-12, January.
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  24. repec:cup:macdyn:v:5:y:2001:i:4:p:533-76 is not listed on IDEAS
  25. Allan W. Gregory & Alfred A. Haug & Nicoletta Lomuto, 2004. "Mixed signals among tests for cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 89-98.
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Cited by:
  1. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2006. "Purchasing Power Parity: The Irish Experience Re-visited," Trinity Economics Papers tep200615, Trinity College Dublin, Department of Economics.

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