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A Century of Purchasing Power Parity Confirmed: The Role of Nonlinearity

Hyeongwoo Kim () and Young-Kyu Moh

MPRA Paper from University Library of Munich, Germany

Abstract: Taylor (2002) claims that Purchasing Power Parity (PPP) has held over the 20th century based on strong evidence of stationarity for century-long real exchange rates for 20 countries. Lopez et al. (2005), however, found much weaker evidence of PPP with alternative lag selection methods. We reevaluate Taylor’s claim by implementing a recently developed nonlinear unit root test by Park and Shintani (2005). We find strong evidence of nonlinear mean-reversion in real exchange rates that confirms Taylor’s claim. We also find a possible misspecification problem in using the ESTAR model that may not be detected with Taylor-approximation based tests.

Keywords: Purchasing Power Parity; Transition Autoregressive Process; inf-t Unit Root Test (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-ifn and nep-opm
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Journal Article: A century of purchasing power parity confirmed: The role of nonlinearity (2010) Downloads
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