A Century of Purchasing Power Parity Confirmed: The Role of Nonlinearity
Hyeongwoo Kim () and
MPRA Paper from University Library of Munich, Germany
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)
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Journal Article: A century of purchasing power parity confirmed: The role of nonlinearity (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:17488
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