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Nonlinear Purchasing Power Parity under the Gold Standard
Ivan Paya and David A. Peel
Southern Economic Journal
Vol. 71, No. 2 (Oct., 2004), pp. 302-313
Published by: Southern Economic Association
Stable URL: http://www.jstor.org/stable/4135293
Page Count: 12
You can always find the topics here!Topics: Real exchange rates, Purchasing power parity, Consumer Price Index, Gold standard, Equilibrium exchange rates, Property reversion, Linear models, Half lives, Standard error, Datasets
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Hegwood and Papell (2002) conclude on the basis of analysis in a linear framework that long-run purchasing power parity (PPP) does not hold for 16 real exchange rate series, which were analyzed in Diebold, Husted, and Rush (1991) for the period 1792-1913 under the Gold Standard. Rather, PPP deviations are mean-reverting to a changing equilibrium-a quasi PPP (QPPP) theory. We analyze the real exchange rate adjustment mechanism for their data set assuming a nonlinear adjustment process allowing for both a constant and a mean shifting equilibrium. Our results confirm that real exchange rates at that time were stationary, symmetric, nonlinear processes that revert to a nonconstant equilibrium rate. Speeds of adjustment were much quicker when breaks were allowed.
Southern Economic Journal © 2004 Southern Economic Association