A nonparametric measure of convergence towards purchasing power parity

Mototsugu Shintani

27 citations0/0 files storedJournal of Applied Econometrics

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Abstract

Abstract It has been claimed that the deviations from purchasing power parity are highly persistent and have quite long half‐lives under the assumption of a linear adjustment of real exchange rates. However, inspired by trade cost models, nonlinear adjustment has been widely employed in recent empirical studies. This paper proposes a simple nonparametric procedure for evaluating the speed of adjustment in the presence of nonlinearity, using the largest Lyapunov exponent of the time series. The empirical result suggests that the speed of convergence to a long‐run price level is indeed faster than what was found in previous studies with linear restrictions. Copyright © 2006 John Wiley & Sons, Ltd.

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References

1988Testing for a Unit Root in Time Series Regression 1991Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models 1996Impulse response analysis in nonlinear multivariate models 1991Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation 1996The Purchasing Power Parity Puzzle 2000The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?2002Dynamic Panel Estimation and Homogenity Testing Under Cross Section Dependence 2001Nonlinear Mean‐Reversion in Real Exchange Rates: Toward a Solution To the Purchasing Power Parity Puzzles

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