Purchasing Power Parity Analyzed from a Continuous-Time Model

Nicolau João ()
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Nicolau João: Instituto Superior de Economia e Gestão

Studies in Nonlinear Dynamics & Econometrics, 2011, vol. 15, issue 3, 26

Abstract: We propose a continuous-time process for modeling real exchange rates (RER) to provide new insights into the mechanism of reversion and into the limit properties of the process. In particular, in connection to the Purchasing Power Parity hypothesis, we discuss concepts such as mean-reversion, stationary distribution and expected time to leave certain intervals. Based on the proposed specification, we model eleven RER among industrialized countries and use the expected time to leave certain intervals to discuss further issues related to the stability of RER.

Date: 2011
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DOI: 10.2202/1558-3708.1773

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