A century of purchasing power parity confirmed: The role of nonlinearity

Hyeongwoo Kim () and Young-Kyu Moh

Journal of International Money and Finance, 2010, vol. 29, issue 7, pages 1398-1405

Abstract: 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.

Keywords: Purchasing; power; parity; Transition; autoregressive; process; Inf-t; unit; root; test (search for similar items in EconPapers)
Date: 2010
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Working Paper: A Century of Purchasing Power Parity Confirmed: The Role of Nonlinearity (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jimfin:v:29:y:2010:i:7:p:1398-1405

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