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Nonlinear Adjustment to Purchasing Power Parity in the post-Bretton Woods Era

  • Christopher F. Baum

    ()

    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • John Barkoulas

    (University of Tennessee)

This paper models the dynamics of adjustment to long-run purchasing power parity (PPP) over the post-Bretton Woods period in a nonlinear framework consistent with the presence of frictions in international trade. We estimate exponential smooth transition autoregressive (ESTAR) models of deviations from PPP using both CPI- and WPI-based measures for a broad set of U.S. trading partners. We find clear evidence of a mean-reverting dynamic process for sizable deviations from PPP, with an equilibrium tendency varying nonlinearly with the magnitude of disequilibrium.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 404..

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Date of creation: 17 Mar 1998
Date of revision: 16 Nov 1999
Publication status: Published, Journal of International Money and Finance, 20, 379-399, 2001.
Handle: RePEc:boc:bocoec:404
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
Web page: http://fmwww.bc.edu/EC/
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