Linear or nonlinear cointegration in the purchasing power parity relationship?

Alfred A. Haug · Syed Abul Basher

39 citations0/0 files storedApplied Economics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

We test long-run Purchasing Power Parity (PPP) within a general model of cointegration of linear and nonlinear form. Nonlinear cointegration is tested with rank tests of Breitung (2001 Breitung, J. 2001. Rank tests for nonlinear cointegration. Journal of Business and Economic Statistics, 19: 331–40. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]). We determine first the order of integration of each variable, using monthly data from the post-Bretton Woods era for G-10 countries. In many cases prices are I(2), whereas all exchange rates are I(1). However, there are several countries that have a price level that linearly cointegrates with the US price level so that this combination is I(1). Overall, we find some, though limited, evidence for nonlinear and also linear cointegration for the weak version of PPP.

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References

1996Efficient Tests for an Autoregressive Unit Root 1995Likelihood-Based Inference in Cointegrated Vector Autoregressive Models 1993A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems 2000Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory*1992Efficient Tests for an Autoregressive Unit Root 2001LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power 1996Numerical distribution functions for unit root and cointegration tests 1996The Purchasing Power Parity Puzzle

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2013Revisiting Purchasing Power Parity for India using threshold cointegration and nonlinear unit root test 2017Empirical conditional quantile test for purchasing power parity: Evidence from East Asian countries 2016Did Purchasing Power Parity Hold in Medieval Europe?

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