PURCHASING POWER PARITY, PRODUCTIVITY DIFFERENTIALS AND NON‐LINEARITY*

Jyh‐Lin Wu · Pei‐Fen Chen · Chingnun Lee

8 citations0/0 files storedManchester School

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

Abstract

The purpose of this paper is to apply a symmetric band threshold autoregressive model to investigate the non‐linear adjustment of the real pound–dollar rate over a period from 1885 to 2003. After controlling for the Harrod–Balassa–Samuelson effects, we find evidence to support a non‐linear mean reversion of the real pound–dollar rate. Moreover, the estimated half‐life is about two years with large shocks. We therefore provide a solution to the purchasing power parity puzzle.

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References

1996Impulse response analysis in nonlinear multivariate models 1964The Purchasing-Power Parity Doctrine: A Reappraisal 1996The Purchasing Power Parity Puzzle 1964Theoretical Notes on Trade Problems 1998Unit-Root Tests and Asymmetric Adjustment With an Example Using the Term Structure of Interest Rates 1997Threshold Cointegration 2001Nonlinear Mean‐Reversion in Real Exchange Rates: Toward a Solution To the Purchasing Power Parity Puzzles 1996Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries

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