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Purchasing power parity and structural instability in the US/UK exchange rate

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  • Karoglou, Michail
  • Morley, Bruce

Abstract

The aim of this study is to determine if nonlinearities have affected purchasing power parity (PPP) since 1885. Also using recent advances in the econometrics of structural change we segment the sample space according to the identified breaks and look at whether the PPP condition holds in each sub-sample and whether this involves linear or non-linear adjustment. Our results suggest that during some sub-periods, PPP holds, although whether it holds or not and whether the adjustment is linear or non-linear, depends primarily on the type of exchange rate regime in operation at any point in time.

Suggested Citation

  • Karoglou, Michail & Morley, Bruce, 2012. "Purchasing power parity and structural instability in the US/UK exchange rate," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 958-972.
  • Handle: RePEc:eee:intfin:v:22:y:2012:i:4:p:958-972
    DOI: 10.1016/j.intfin.2012.05.001
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    References listed on IDEAS

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    Cited by:

    1. Ahmad, Ahmad Hassan & Aworinde, Olalekan Bashir, 2016. "The role of structural breaks, nonlinearity and asymmetric adjustments in African bilateral real exchange rates," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 144-159.
    2. Olalekan Bashir Aworinde, 2014. "Are Bilateral Real Exchange Rates Stationary? Empirical Evidence from Nigeria," Economics Bulletin, AccessEcon, vol. 34(1), pages 271-286.
    3. Janice Breuer & Vikram Kumar & Shyam Suresh, 2015. "Inter-Temporal Purchasing Power Parity," Open Economies Review, Springer, vol. 26(5), pages 869-891, November.
    4. repec:rbs:ijbrss:v:5:y:2016:i:1:p:54-64 is not listed on IDEAS
    5. Karl-Heinz Schild & Karsten Schweikert, 2019. "On the Validity of Tests for Asymmetry in Residual-Based Threshold Cointegration Models," Econometrics, MDPI, Open Access Journal, vol. 7(1), pages 1-13, March.
    6. Zhang, Zhibai & Bian, Zhicun, 2015. "Absolute purchasing power parity in industrial countries," MPRA Paper 66241, University Library of Munich, Germany.

    More about this item

    Keywords

    Purchasing power parity; Structural breaks; Non-linear cointegration;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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