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A Nonparametric Measure of Convergence Toward Purchasing Power Parity

  • Mototsugu Shintani

    ()

    (Department of Economics, Vanderbilt University)

It has been claimed that the deviations from purchasing power parity are highly persistent and have quite long half-lives under the assumption of a linear adjustment of real exchange rates. However, inspired by trade cost models, nonlinear adjustment has been widely employed in recent empirical studies. This paper proposes a simple nonparametric procedure for evaluating the speed of adjustment in the presence of nonlinearity, using the largest Lyapunov exponent of the time series. The empirical result suggests that the speed of convergence to a long-run price level is indeed faster than what was found in previous studies with linear restrictions.

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File URL: http://www.accessecon.com/pubs/VUECON/vu02-w19R.pdf
File Function: Revised version, 2004
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0219.

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Date of creation: Aug 2002
Date of revision: Jul 2004
Handle: RePEc:van:wpaper:0219
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  10. Christopher F. Baum & Mustafa Caglayan & John Barkoulas, 1998. "Nonlinear Adjustment to Purchasing Power Parity in the post-Bretton Woods Era," Boston College Working Papers in Economics 404., Boston College Department of Economics, revised 16 Nov 1999.
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  16. Sercu, Piet & Uppal, Raman, 2003. "Exchange rate volatility and international trade: A general-equilibrium analysis," European Economic Review, Elsevier, vol. 47(3), pages 429-441, June.
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  22. Lutz Kilian & Tao Zha, 2002. "Quantifying the uncertainty about the half-life of deviations from PPP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(2), pages 107-125.
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