PPP may hold better than you think: Smooth breaks and non-linear mean reversion in real effective exchange rates |
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| Institution: | 1. Department of Economics, Southern Illinois University, Edwardsville, IL 62026-1102, USA;2. Department of Economics, University of Texas at San Antonio, San Antonio, TX 78249-0633, USA;1. Department of Quantitative Methods, University of Economics in Bratislava, Tajovského 13, 041 30 Ko?ice, Slovak Republic;2. Department of Economics, Faculty of Business Economics in Ko?ice, University of Economics in Bratislava, Tajovského 13, 041 30 Ko?ice, Slovak Republic;1. Graham School of Management, Saint Xavier University, United States;2. The University of Texas at San Antonio, United States;1. Universidad Nacional del Sur and Conicet, Bahía Blanca, Argentina;2. Universidade Federal Rural de Pernambuco, Departamento de Estatística e Informática, Recife, Brazil |
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| Abstract: | This paper revisits some key topics in the literature on purchasing power parity (PPP). The study applies a set of newly developed unit root tests, which account for both nonlinearity and multiple smooth temporary breaks in series, to the real effective exchange rates (REERs) of 23 developed countries. The results suggest that PPP generally holds for various currency-based real rates. There is evidence in favor of linear stationarity in REERs for highly integrated economies. The REERs of most other countries tend to have nonlinear adjustment toward large long-swing type mean changes around constant equilibrium values. |
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| Keywords: | PPP Real effective exchange rates Nonlinear stationarity Smooth structural breaks F31 C22 |
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