Non-linear adjustments to intranational PPP

Kai-Yin Woo, Shu-Kam Lee and Alan Chan ()

Journal of Macroeconomics, 2014, vol. 40, issue C, 360-371

Abstract: We study the intranational purchasing power parity (PPP) between 17 pairs of Canadian cities for the period 1984–2010, using multivariate tests of threshold cointegration in a threshold vector error correction model. Our results confirm the existence of cointegration with threshold symmetric and asymmetric adjustment processes toward PPP equilibrium. We also estimate the unconditional half-lives for non-linear PPP deviations to measure PPP persistence. We find that the speed of non-linear mean reversion may be faster than previously thought when allowing non-linear adjustments. In addition, we measure the absorption of shocks and suggest that different types of shocks are absorbed at different rates by different variables in the system. The evidence reveals that there are complex non-linearities in the price data and these justify the use of non-linear methods to study adjustments to intranational PPP.

Keywords: Multivariate threshold cointegration; Non-linear impulse responses; Mean bias; Unconditional half-life; Absorption of shocks; Canada (search for similar items in EconPapers)
JEL-codes: C15 C32 F15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:40:y:2014:i:c:p:360-371

DOI: 10.1016/j.jmacro.2014.01.013

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