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Exchange rate misalignment and nonlinear convergence to purchasing power parity in the European exchange rate mechanism

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  • Matteo Iannizzotto

Abstract

In the wake of recent contributions, a nonlinear adjustment to purchasing power parity is explored over the real exchange rates of two key European currencies with respect to the German Mark: the Italian Lira and the French Franc. The periods considered in the estimation range from the demise of the Bretton Woods system to the crisis of the European Exchange Rate Mechanism. The estimation results lend support to a growing literature both theoretical and empirical that has suggested that significant nonlinearities may be present in exchange rate series. This finding is also important for the internal consistency of the ERM.

Suggested Citation

  • Matteo Iannizzotto, 2001. "Exchange rate misalignment and nonlinear convergence to purchasing power parity in the European exchange rate mechanism," Applied Financial Economics, Taylor & Francis Journals, vol. 11(5), pages 511-526.
  • Handle: RePEc:taf:apfiec:v:11:y:2001:i:5:p:511-526
    DOI: 10.1080/096031001752236799
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    1. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December.
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    1. repec:kap:iaecre:v:14:y:2008:i:1:p:11-24 is not listed on IDEAS
    2. Mark J.Holmes, 2002. "Are there non linearities in US: Latin American real exchange behavior," Estudios de Economia, University of Chile, Department of Economics, vol. 29(2 Year 20), pages 177-190, December.
    3. Holmes, Mark J. & Maghrebi, Nabil, 2004. "Asian real interest rates, nonlinear dynamics, and international parity," International Review of Economics & Finance, Elsevier, vol. 13(4), pages 387-405.
    4. Katja Funke & Isabell Koske, 2008. "Does the Law of One Price Hold within the EU? A Panel Analysis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 11-24, February.
    5. Mark Holmes & Ping Wang, 2006. "Asymmetric adjustment towards long-run PPP: Some new evidence for Asian economies," International Economic Journal, Taylor & Francis Journals, vol. 20(2), pages 161-177.

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