A century of purchasing power parity confirmed: The role of nonlinearity
Taylor (2002) claims that Purchasing Power Parity (PPP) has held over the 20th century based on strong evidence of stationary for century-long real exchange rates for 20 countries. Lopez et al. (2005), however, found much weaker evidence of PPP with alternative lag selection methods. We reevaluate Taylor's claim by implementing a recently developed nonlinear unit root test by Park and Shintani (2005). We find strong evidence of nonlinear mean-reversion in real exchange rates that confirms Taylor's claim. We also find a possible misspecification problem in using the ESTAR model that may not be detected with Taylor-approximation based tests.
Year of publication: |
2010
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Authors: | Kim, Hyeongwoo ; Moh, Young-Kyu |
Published in: |
Journal of International Money and Finance. - Elsevier, ISSN 0261-5606. - Vol. 29.2010, 7, p. 1398-1405
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Publisher: |
Elsevier |
Keywords: | Purchasing power parity Transition autoregressive process Inf-t unit root test |
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