Nonlinear Purchasing Power Parity under the Gold Standard

Ivan Paya () and David Peel

Southern Economic Journal, 2004, vol. 71, issue 2, 302-313

Abstract: Hegwood and Papell (2002) conclude on the basis of analysis in a linear framework that long‐run purchasing power parity (PPP) does not hold for 16 real exchange rate series, which were analyzed in Diebold. I lusted, and Rush (1991) for the period 1792‐1913 under the Gold Standard. Rather, PPP deviations are mean‐reverting to a changing equilibrium—a quasi PPP (QPPP) theory. We analyze the real exchange rate adjustment mechanism for their data set assuming a nonlinear adjustment process allowing for both a constant and a mean shifting equilibrium. Our results confirm that real exchange rates at that time were stationary, symmetric, nonlinear processes that revert to a nonconstant equilibrium rate. Speeds of adjustment were much quicker when breaks were allowed.

Date: 2004
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https://doi.org/10.1002/j.2325-8012.2004.tb00641.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:71:y:2004:i:2:p:302-313

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