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Purchasing Power Parity and Markov Regime Switching

  • Kanas, Angelos
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    We revisit the evidence on PPP in the twentieth century allowing for Markov regime switching in the ADF regression. Using Lopez et al.'s (2005) extension of Taylor's (2002) original data set, our results are: (1) For most countries, there are periods over which the real exchange rate is stationary and PPP holds, and periods over which the real exchange rate is non-stationary and PPP does not hold, namely, regime-dependent stationarity. Thus, real exchange rate stationarity is a stochastic event itself. (2) The probability that the real exchange rate is stationary is less than 50% for most countries. (3) There is evidence of non-stationarity during both the Bretton Woods and the recent float periods for the majority countries. The comparative performance of PPP is slightly better during Bretton Woods than the recent float.

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    File URL: http://dx.doi.org/10.1353/mcb.2006.0083
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    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 38 (2006)
    Issue (Month): 6 (September)
    Pages: 1669-1687

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    Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:6:p:1669-1687
    Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    6. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr.
    7. Claude Lopez & Christian J. Murray & David H. Papell, 2004. "State of the Art Unit Root Tests and Purchasing Power Parity," University of Cincinnati, Economics Working Papers Series 2004-04, University of Cincinnati, Department of Economics.
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    17. Sollis, Robert & Leybourne, Stephen & Newbold, Paul, 2002. "Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 686-700, August.
    18. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
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