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Purchasing Power Parity, Productivity Differentials And Non-Linearity

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  • JYH-LIN WU
  • PEI-FEN CHEN
  • CHING-NUN LEE

Abstract

The purpose of this paper is to apply a symmetric band threshold autoregressive model to investigate the non-linear adjustment of the real pound-dollar rate over a period from 1885 to 2003. After controlling for the Harrod-Balassa-Samuelson effects, we find evidence to support a non-linear mean reversion of the real pound-dollar rate. Moreover, the estimated half-life is about two years with large shocks. We therefore provide a solution to the purchasing power parity puzzle. Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd and The University of Manchester.

Suggested Citation

  • Jyh-Lin Wu & Pei-Fen Chen & Ching-Nun Lee, 2009. "Purchasing Power Parity, Productivity Differentials And Non-Linearity," Manchester School, University of Manchester, vol. 77(3), pages 271-287, June.
  • Handle: RePEc:bla:manchs:v:77:y:2009:i:3:p:271-287
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    References listed on IDEAS

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    Cited by:

    1. Paul R. Bergin & Reuven Glick & Jyh-Lin Wu, 2013. "The Micro-Macro Disconnect of Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 798-812, July.
    2. Woo, Kai-Yin & Lee, Shu-Kam & Chan, Alan, 2014. "Non-linear adjustments to intranational PPP," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 360-371.
    3. Wu, Jyh-Lin & Cheng, Su-Yin & Hou, Han, 2011. "Further evidence on purchasing power parity and country characteristics," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 257-266, April.

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