How well does nonlinear mean reversion solve the PPP puzzle?

Stephen Norman

Journal of International Money and Finance, 2010, vol. 29, issue 5, 919-937

Abstract: This paper addresses the degree to which models which exhibit nonlinear mean reversion (NMR) present a resolution to the Purchasing Power Parity Puzzle. This paper develops a method of estimating a representative distribution of half lives which is based upon the observed distribution of shocks in a given time series rather than choosing shock sizes arbitrarily which is the current practice in the literature. This approach is implemented with data on five real exchange rates. The empirical analysis shows that half lives shorter than the consensus are observed frequently enough to support the proposition that NMR is a solution to the PPP puzzle.

Keywords: C22; F31; Nonlinear; impulse; response; analysis; Purchasing; power; parity; Half; life; Smooth; transition; autoregressive; model; Real; exchange; rates (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261-5606(10)00016-1
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:29:y:2010:i:5:p:919-937

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().