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Unit Roots, Nonlinear Cointegration and Purchasing Power Parity

Author

Listed:
  • Alfred A. Haug

    (Department of Economics, York University)

  • Syed A. Basher

    (Department of Economics, York University)

Abstract

We test long¨Crun PPP within a general model of cointegration of linear and nonlinear form. Nonlinear cointegration is tested with rank tests proposed by Breitung (2001). We start with determining the order of integration of each variable in the model, applying relatively powerful DF¨CGLS tests of Elliott, Rothenberg and Stock (1996). Using monthly data from the post¨CBretton Woods era for G¨C10 countries, the evidence leads to a rejection of PPP for almost all countries. In several cases the price variables are driven by permanent shocks that differ from the ones that drive the exchange rate. Also, nonlinear cointegration cannot solve the PPP puzzle.

Suggested Citation

  • Alfred A. Haug & Syed A. Basher, 2003. "Unit Roots, Nonlinear Cointegration and Purchasing Power Parity," Working Papers 2003_1, York University, Department of Economics, revised Jun 2005.
    • Handle: RePEc:yca:wpaper:2003_1
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    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2003/Haug_Basher_06_2005.pdf
    File Function: First version, 2003
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    Cited by:

    1. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2006. "Purchasing Power Parity: The Irish Experience Re-visited," Trinity Economics Papers tep200615, Trinity College Dublin, Department of Economics.

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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