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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
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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. Alan M. Taylor & Mark Taylor, 2004. "The Purchasing Power Parity Debate," Working Papers 46, University of California, Davis, Department of Economics.
  2. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
  3. Breitung, Jörg, 1998. "Rank tests for nonlinear cointegration," SFB 373 Discussion Papers 1998,65, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  4. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
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  7. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  8. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  9. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
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  12. Yin-Wong Cheung & Kon S. Lai & Michael Bergman, 2003. "Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustment," CESifo Working Paper Series 924, CESifo Group Munich.
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  18. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
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  22. Shabtai Donnenfeld & Alfred Haug, 2003. "Currency Invoicing in International Trade: an Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 11(2), pages 332-345, 05.
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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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