NONLINEAR PPP UNDER THE GOLD STANDARD

Ivan Paya (i.paya@lancaster.ac.uk) and David Peel

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: Hegwood and Papell (2002) conclude on the basis of analysis in a linear framework that long-run purchasing power parity (PPP)\ does not hold for sixteen real exchange rate series, analyzed in Diebold, Husted, and Rush (1991) for the period 1792-1913, under the Gold Standard. Rather, purchasing power parity deviations are mean-reverting to a changing equilibrium -a quasi PPP (QPPP) theory. We analyze the real exchange rate adjustment mechanism for their data set assuming a nonlinear adjustment process allowing for both a constant and a mean shifting equilibrium. Our results confirm that real exchange rates at that time were stationary, symmetric, nonlinear processes that revert to a non-constant equilibrium rate. Speeds of adjustment were much quicker when breaks were allowed.

Keywords: Purchasing Power Parity; ESTAR; Bootstrapping. (search for similar items in EconPapers)
JEL-codes: C15 C22 C51 F31 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2004-06
New Economics Papers: this item is included in nep-fmk, nep-his and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2004-24

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