PURCHASING POWER PARITY, PRODUCTIVITY DIFFERENTIALS AND NON‐LINEARITY*

Jyh‐lin Wu, Pei-Fen Chen and Ching‐nun Lee

Manchester School, 2009, vol. 77, issue 3, 271-287

Abstract: The purpose of this paper is to apply a symmetric band threshold autoregressive model to investigate the non‐linear adjustment of the real pound–dollar rate over a period from 1885 to 2003. After controlling for the Harrod–Balassa–Samuelson effects, we find evidence to support a non‐linear mean reversion of the real pound–dollar rate. Moreover, the estimated half‐life is about two years with large shocks. We therefore provide a solution to the purchasing power parity puzzle.

Date: 2009
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https://doi.org/10.1111/j.1467-9957.2009.02097.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:manchs:v:77:y:2009:i:3:p:271-287

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