Explaining the persistence of deviations from PPP: a non-linear Harrod-Balassa-Samuelson effect?
Researchers have long been vexed by the persistence of real exchange rate deviations from linear-form PPP. Two of the more popular explanations involve the role of supply shocks to the exchange rate, for instance as captured by the Harrod-Balassa-Samuelson (HBS) hypothesis that emphasizes the role of intra-economy productivity differentials, and non-linear adjustment dynamics reflecting, inter alia, non-trivial transaction costs and investor heterogeneity within the foreign exchange market. hese explanations are typically considered in isolation of one another. By contrast, this study explores whether a non-linear model that incorporates the HBS effect, as well as Terms of Trade shocks, can account for the persistence of deviations from PPP. Using quarterly data for three major exchange rates, it concludes in favour of a significant explanatory role for both variables within linear VECMs and non-linear ESTAR models. However, no strong evidence is found to suggest that these ESTAR models encompass their linear alternatives, implying that the economic benefit of modelling PPP deviations as a non-linear process is limited once account has been made of relevant supply shocks.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 16 (2006)
Issue (Month): 1-2 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAFE20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAFE20|
When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:16:y:2006:i:1-2:p:41-61. 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: (Michael McNulty)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.