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A nonparametric measure of convergence towards purchasing power parity

✍ Scribed by Mototsugu Shintani

Publisher: John Wiley and Sons
Year: 2006
Tongue: English
Weight: 141 KB
Volume: 21
Category: Article
ISSN: 0883-7252
DOI: 10.1002/jae.867

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✦ Synopsis

Abstract

It has been claimed that the deviations from purchasing power parity are highly persistent and have quite long half‐lives under the assumption of a linear adjustment of real exchange rates. However, inspired by trade cost models, nonlinear adjustment has been widely employed in recent empirical studies. This paper proposes a simple nonparametric procedure for evaluating the speed of adjustment in the presence of nonlinearity, using the largest Lyapunov exponent of the time series. The empirical result suggests that the speed of convergence to a long‐run price level is indeed faster than what was found in previous studies with linear restrictions. Copyright © 2006 John Wiley & Sons, Ltd.

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