PPP may hold better than you think: Smooth breaks and non-linear mean reversion in real effective exchange rates

Ali Kutan and Su Zhou

Economic Systems, 2015, vol. 39, issue 2, 358-366

Abstract: This paper revisits some key topics in the literature on purchasing power parity (PPP). The study applies a set of newly developed unit root tests, which account for both nonlinearity and multiple smooth temporary breaks in series, to the real effective exchange rates (REERs) of 23 developed countries. The results suggest that PPP generally holds for various currency-based real rates. There is evidence in favor of linear stationarity in REERs for highly integrated economies. The REERs of most other countries tend to have nonlinear adjustment toward large long-swing type mean changes around constant equilibrium values.

Keywords: PPP; Real effective exchange rates; Nonlinear stationarity; Smooth structural breaks (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:39:y:2015:i:2:p:358-366

DOI: 10.1016/j.ecosys.2014.12.001

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