IDEAS home Printed from https://ideas.repec.org/a/bla/ecorec/v83y2007i260p74-85.html
   My bibliography  Save this article

Are Nominal Exchange Rates and Price Levels Co-Integrated? New Evidence from Threshold Autoregressive and Momentum-Threshold Autoregressive Models

Author

Listed:
  • PARESH KUMAR NARAYAN

Abstract

The goal of this paper is to examine evidence for co-integration between nominal exchange rates for Canada, the UK, Japan, Germany, Italy and France (G6) vis-à-vis the US dollar, and the relative price ratios using monthly data over the period 1973:01 to 1997:04. Motivated by the fact that exchange rate adjustment may be asymmetric, we allowed for asymmetric adjustment in exchange rates by using the threshold autoregressive model and the momentum threshold autoregressive model. We do not find any evidence of a co-integrating relationship; hence, we fail to establish long-run purchasing power parity. Copyright © 2007 The Economic Society of Australia.

Suggested Citation

  • Paresh Kumar Narayan, 2007. "Are Nominal Exchange Rates and Price Levels Co-Integrated? New Evidence from Threshold Autoregressive and Momentum-Threshold Autoregressive Models," The Economic Record, The Economic Society of Australia, vol. 83(260), pages 74-85, March.
  • Handle: RePEc:bla:ecorec:v:83:y:2007:i:260:p:74-85
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/servlet/useragent?func=synergy&synergyAction=showTOC&journalCode=ecor&volume=83&issue=260&year=2007&part=null
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    3. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-879, August.
    4. Mark Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 1-17.
    5. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    6. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    7. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    8. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    9. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-311, July.
    10. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-176, April.
    11. Kargbo, Joseph M., 2003. "Cointegration Tests of Purchasing Power Parity in Africa," World Development, Elsevier, vol. 31(10), pages 1673-1685, October.
    12. Rhee, Wooheon & Rich, Robert W., 1995. "Inflation and the asymmetric effects of money on output fluctuations," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 683-702.
    13. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
    14. Enders, Walter, 1988. "ARIMA and Cointegration Tests of PPP under Fixed and Flexible Exchange Rate Regimes," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 504-508, August.
    15. Papell, David H. & Theodoridis, Hristos, 1998. "Increasing evidence of purchasing power parity over the current float," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 41-50, February.
    16. Mark, Nelson C., 1990. "Real and nominal exchange rates in the long run: An empirical investigation," Journal of International Economics, Elsevier, vol. 28(1-2), pages 115-136, February.
    17. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
    18. Taylor, Mark P. & McMahon, Patrick C., 1988. "Long-run purchasing power parity in the 1920s," European Economic Review, Elsevier, vol. 32(1), pages 179-197, January.
    19. Fleissig, Adrian R. & Strauss, Jack, 2000. "Panel unit root tests of purchasing power parity for price indices," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 489-506, August.
    20. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    21. Jakob Madsen & Bill Yang, 1998. "Asymmetric price adjustment in a menu-cost model," Journal of Economics, Springer, vol. 68(3), pages 295-309, October.
    22. Paresh Kumar Narayan, 2006. "Are bilateral real exchange rates stationary? Evidence from Lagrange multiplier unit root tests for India," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 63-70.
    23. Lucio Sarno & Ibrahim Chowdhury, 2003. "The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(3), pages 295-333, November.
    24. Walter Enders & Selahattin Dibooglu, 2001. "Long-Run Purchasing Power Parity with Asymmetric Adjustment," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 433-445, October.
    25. Alston Flynn, N. & Boucher, Janice L., 1993. "Tests of long-run Purchasing Power Parity using alternative methodologies," Journal of Macroeconomics, Elsevier, vol. 15(1), pages 109-122.
    26. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    27. Grilli, Vittorio & Kaminsky, Graciela, 1991. "Nominal exchange rate regimes and the real exchange rate : Evidence from the United States and Great Britain, 1885-1986," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 191-212, April.
    28. Phylaktis, Kate, 1992. "Purchasing power parity and cointegration: The Greek evidence from the 1920s," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 502-513, October.
    29. Walter Enders & Kamol Chumrusphonlert, 2004. "Threshold cointegration and purchasing power parity in the pacific nations," Applied Economics, Taylor & Francis Journals, vol. 36(9), pages 889-896.
    30. Pippenger, Michael K., 1993. "Cointegration tests of purchasing power parity: the case of Swiss exchange rates," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 46-61, February.
    31. Fisher, Eric O'N & Park, Joon Y, 1991. "Testing Purchasing Power Parity under the Null Hypothesis of Co-integration," Economic Journal, Royal Economic Society, vol. 101(409), pages 1476-1484, November.
    32. M. Ege Yazgan, 2003. "The purchasing power parity hypothesis for a high inflation country: a re-examination of the case of Turkey," Applied Economics Letters, Taylor & Francis Journals, vol. 10(3), pages 143-147.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ai Lian Tan Author_Email: tanal@utar.edu.my & Shiau Mooi Lim & Seow Shin Koong & Ying Yin Koay, 2011. "Exchange Rate And Current Account: Are They Co-Integrated Symmetrically Or Asymmetrically?," Annual Summit on Business and Entrepreneurial Studies (ASBES 2011) Proceeding 2011-019-150, Conference Master Resources.
    2. Duasa, Jarita, 2009. "Asymmetric cointegration relationship between real exchange rate and trade variables: The case of Malaysia," MPRA Paper 14535, University Library of Munich, Germany.
    3. Kalyoncu, Huseyin & Kalyoncu, Kahraman, 2008. "Purchasing power parity in OECD countries: Evidence from panel unit root," Economic Modelling, Elsevier, vol. 25(3), pages 440-445, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecorec:v:83:y:2007:i:260:p:74-85. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/esausea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.