Real Exchange Rate Stationarity in Latin America and Relative Purchasing Power Parity: A Regime Switching Approach |
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Authors: | Mark J Holmes |
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Institution: | (1) Department of Economics, Waikato University Management School, Private Bag 3105, Hamilton, 3240, New Zealand |
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Abstract: | This paper tests for long-run purchasing power (PPP) among a sample of six Latin American economies. The key contribution
of this paper is in terms of the econometric methodology where non-stationarity of the real exchange rate is tested within
a Markov regime-switching framework. In contrast to existing studies, this paper defines two new concepts of PPP where one
allows for the possibility that real exchange behaviour either switches between stationary and non-stationary regimes (partial
PPP), or switches between stationary regimes characterised by differing degrees of persistence (varied PPP). Whereas standard
univariate unit root testing suggests that Latin American real exchange rates are generally non-stationary, employment of
the regime-switching methodology indicates that most of the sample is characterised by the existence of two distinct stationary
regimes. Further analysis indicates that the high rates of inflation and exchange rate volatility experienced in Latin American
have given some impetus towards facilitating long-run PPP.
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Keywords: | Latin America PPP Regime-switching Stationarity Unit root tests |
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