Nonlinear Adjustment to Purchasing Power Parity in the post-Bretton Woods Era

Christopher Baum, Mustafa Caglayan (m.caglayan@hw.ac.uk) and John Barkoulas

No 404., Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper models the dynamics of adjustment to long-run purchasing power parity (PPP) over the post-Bretton Woods period in a nonlinear framework consistent with the presence of frictions in international trade. We estimate exponential smooth transition autoregressive (ESTAR) models of deviations from PPP using both CPI- and WPI-based measures for a broad set of U.S. trading partners. We find clear evidence of a mean-reverting dynamic process for sizable deviations from PPP, with an equilibrium tendency varying nonlinearly with the magnitude of disequilibrium.

Keywords: purchasing power parity; ESTAR; cointegration. (search for similar items in EconPapers)
JEL-codes: C22 F32 (search for similar items in EconPapers)
Date: 1998-03-17, Revised 1999-11-16
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Citations: View citations in EconPapers (42)

Published, Journal of International Money and Finance, 20, 379-399, 2001.

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Journal Article: Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:404

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