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Linear or nonlinear cointegration in the purchasing power parity relationship?

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  • Alfred Haug
  • Syed Basher

Abstract

We test long-run Purchasing Power Parity (PPP) within a general model of cointegration of linear and nonlinear form. Nonlinear cointegration is tested with rank tests of Breitung (2001). We determine first the order of integration of each variable, using monthly data from the post-Bretton Woods era for G-10 countries. In many cases prices are I(2), whereas all exchange rates are I(1). However, there are several countries that have a price level that linearly cointegrates with the US price level so that this combination is I(1). Overall, we find some, though limited, evidence for nonlinear and also linear cointegration for the weak version of PPP.

Suggested Citation

  • Alfred Haug & Syed Basher, 2011. "Linear or nonlinear cointegration in the purchasing power parity relationship?," Applied Economics, Taylor & Francis Journals, vol. 43(2), pages 185-196.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:2:p:185-196
    DOI: 10.1080/00036840802403656
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    References listed on IDEAS

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    Cited by:

    1. Ye, Yonggang & Chang, Tsangyao & Hung, Ken & Lu, Yang-Cheng, 2011. "Revisiting rational bubbles in the G-7 stock markets using the Fourier unit root test and the nonparametric rank test for cointegration," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 82(2), pages 346-357.
    2. Aviral Tiwari & Muhammad Shahbaz, 2014. "Revisiting Purchasing Power Parity for India using threshold cointegration and nonlinear unit root test," Economic Change and Restructuring, Springer, vol. 47(2), pages 117-133, May.
    3. Thurai Murugan Nathan & Venus Khim-Sen Liew, 2013. "Does Electricity Consumption have Significant Impact towards the Sectoral Growth of Cambodia? Evidence from Wald Test Causality Relationship," Journal of Empirical Economics, Research Academy of Social Sciences, vol. 1(2), pages 59-66.
    4. Paradiso, Antonio & Kumar, Saten & Lucchetta, Marcella, 2014. "Investigating the US consumer credit determinants using linear and non-linear cointegration techniques," Economic Modelling, Elsevier, vol. 42(C), pages 20-28.
    5. Robertson, Raymond & Kumar, Anil & Dutkowsky, Donald H., 2014. "Weak-form and strong-form purchasing power parity between the US and Mexico: A panel cointegration investigation," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 241-262.
    6. Liew, Venus Khim-Sen & Ling, Tai-Hu & Chia, Ricky Chee-Jiun & Yoon, Gawon, 2012. "On the application of the rank tests for nonlinear cointegration to PPP: The case of Papua New Guinea," Economic Modelling, Elsevier, vol. 29(2), pages 326-332.
    7. Saten Kumar, 2016. "Is the US Consumer Credit Asymmetric?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(2), pages 194-215, May.
    8. Chang, Tsangyao & Chiu, Chi Chen & Tzeng, Han Wen, 2011. "Revisiting Purchasing Power Parity for Nine Transition Countries Using the Rank Test for Nonlinear Cointegration," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 19-30, June.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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