Nonlinear Trend and Purchasing Power Parity

Yinghao Luo ()

Journal of Economics Bibliography, 2016, vol. 3, issue 3, 490-497

Abstract: After the collapse of the Bretton Woods system, the evidence on the purchasing power parity (PPP) in the long run is still a matter of debate. The difficulties of the problem are the possible nonstationarity of relative price indices and nominal exchange rates. The traditional ways to deal with nonstationarity such as unit root model and cointegration have some problems. In this paper, to deal with nonstationarity, we apply the Hodrick-Prescott (HP) trend-cycle filter in real business cycle literature (Hodrick and Prescott, 1981) which can give a nonlinear smooth-trend, and we find that after the 1970s float, the monthly HP trends of US dollar/UK sterling and Deutsche marks/US dollar have certain relevance with their corresponding HP trends of relative consumer price indices. This result indicates that there is no strong evidence to directly deny that the PPP is valid in the long run. In this sense, it is not reliable to directly deny the belief of monetary neutrality.

Keywords: HP filter; Purchasing power parity; Monetary neutrality (search for similar items in EconPapers)
JEL-codes: C00 C01 C20 C30 (search for similar items in EconPapers)
Date: 2016
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:ksp:journ6:v:3:y:2016:i:3:p:490-497

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