Nonlinear mean-reversion in real exchange rates: Toward a solution to the purchasing power parity puzzles

International Economic Review

Volumn 42, Issue 4, 2001, Pages 1015-1042

  Taylor, Mark P ^a   Peel, David A ^b   Sarno, Lucio ^c  

^a UNIVERSITY OF WARWICK   (United Kingdom)

^b CARDIFF UNIVERSITY   (United Kingdom)

^c UNIVERSITY OF OXFORD   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0003045718     PISSN: 00206598     EISSN: None     Source Type: Journal    
DOI: 10.1111/1468-2354.00144     Document Type: Article

References (79)

1. ABUAF, N., AND P. JORION, "Purchasing Power Parity in the Long Run," Journal of Finance 45 (1990), 157-74
2. ANDREWS, D. W. K., AND W. PLOBERGER, "Optimal Tests when a Nuisance Parameter is Present Only Under the Alternative," Econometrica 62 (1994), 1383-1414
3. ARTIS, M. J., AND M. P. TAYLOR, "Exchange Rates, Interest Rates, Capital Controls and the European Monetary System: Assessing the Track Record," in F. Giavazzi, S. Micossi, and M. Miller, eds., The European Monetary System (Cambridge: Cambridge University Press, 1988)
4. BALKE, N. S., AND T. B. FOMBY, "Threshold Cointegration," International Economic Review 38 (1997), 627-45
5. BAXTER, M., AND A. C. STOCKMAN, "Business Cycles and the Exchange Rate System," Journal of Monetary Economics 23 (1989), 377-400
6. BENNINGA, S., AND A. A. PROTOPAPADAKIS, "The Equilibrium Pricing of Exchange Rates and Assets When Trade Takes Time," Journal of International Economics 1 (1988), 129-49
7. BERTOLA, G., AND R. J. CABALLERO, "Kinked Adjustment Costs and Aggregate Dynamics," in O. J. Blanchard, and S. Fischer, eds., NBER Macroeconomics Annual (Cambridge, MA: MIT Press, 1990)
8. CANZONERI, M. B., R. E. CUMBY, AND B. DIBA, "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," Journal of International Economics 47 (1999), 245-66
9. CASSEL, G., "Abnormal Deviations in International Exchanges," Economic Journal 28 (1918), 413-15
10. _, Money and Foreign Exchange after 1914 (London: Constable, 1922)
11. CHEUNG, Y. W., AND K. S. LAI, "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business Economics and Statistics 11 (1993a), 103-12
12. _ AND _, "Finite-Sample Sizes of Johansen's Likelihood Ratio Tests for Cointegration," Oxford Bulletin of Economics and Statistics 55 (1993b), 313-28
13. _ AND _, "Parity Reversion in Real Exchange Rates During the Post-Bretton Woods Period," Journal of International Money and Finance 17 (1998), 597-614
14. COLEMAN, A. M. G., "Arbitrage, Storage and the Law of One Price: New Theory for the Time Series Analysis of an Old Problem," discussion paper, Department of Economics, Princeton University, 1995
15. DAVUTYAN, N., AND J. PIPPENGER, "Testing Purchasing Power Parity: Some Evidence of the Effects of Transactions Costs," Econometric Reviews 9 (1990), 211-40
16. DIEBOLD, F. X., S. HUSTED, AND M. RUSH, "Real Exchange Rates under the Gold Standard," Journal of Political Economy 99 (1991), 1252-71
17. _, J.-H. LEE, and G. C. WEINBACH, "Regime Switching with Time-Varying Transition Probabilities," in C. P. Hargreaves, ed., Nonstationary Time Series Analysis and Cointegration (Oxford and New York: Oxford University Press, 1994)
18. DIXIT, A. K., "Hysteresis, Import Penetration and Exchange Rate Pass-Through," Quarterly Journal of Economics 104 (1989), 205-28
19. DORNBUSCH, R., Open Economy Macroeconomics (New York: Basic Books, 1980)
20. DUMAS, B., "Dynamic Equilibrium and the Real Exchange Rate in Spatially Separated World," Review of Financial Studies 5 (1992), 153-80
21. _, "Partial Equilibrium Versus General Equilibrium Models of the International Capital Market," in F. Van Der Ploeg, ed., The Handbook of International Macroeconomics (Oxford: Blackwell, 1994), Chap. 10
22. EITRHEIM, O., AND T. TERÄSVIRTA, ̈Testing the Adequacy of Smooth Transition Autoregressive Models," Journal of Econometrics 74 (1996), 59-75
23. ELWOOD, S. K., "Is the Persistence of Shocks to Output Asymmetric?," Journal of Monetary Economics 41 (1998), 411-26
24. ENGEL, C., "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy 107 (1999), 507-38
25. ENGLE, R. F., AND C. W. J. GRANGER, "Cointegration and Error Correction: Representation, Estimation and Testing," Econometrica 55 (1987), 251-76
26. FLOOD, R. P., AND M. P. TAYLOR, "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?," in J. A. Frankel, G. Galli, and A. Giovannini, eds., The Microstructure of Foreign Exchange Markets (Chicago: Chicago University Press, 1996)
27. FRANKEL, J. A., "International Capital Mobility and Crowding out in the US Economy: Imperfect Integration of Financial Markets or Goods Markets?," in R. W. Hafer, ed., How Open is the US Economy? (Lexington: Lexington Books, 1986)
28. _, "Zen and the Art of Modern Macroeconomics: The Search for Perfect Nothingness," in W. Haraf, and T. Willett, eds., Monetary Policy for a Volatile Global Economy (Washington, DC: American Enterprise Institute, 1990)
29. _ AND A. K. ROSE, "A Panel Project on Purchasing Power Parity: Mean Reversion within and between Countries," Journal of International Economics 40 (1996), 209-24
30. FROOT, K. A., AND K. ROGOFF, "Perspectives on PPP and Long-run Real Exchange Rates," in K. Rogoff, and G. Grossman, eds., Handbook of International Economics (Amsterdam: North-Holland, 1995)
31. FULLER, W. A., Introduction to Statistical Time Series (New York: Wiley, 1976)
32. GALLANT, A. R., P. E. ROSSI, and G. TAUCHEN, "Nonlinear Dynamic Structures," Econometrica 61 (1993), 871-908
33. GRANGER, C. W. J., AND T. TERÄSVIRTA, Modelling Nonlinear Economic Relationships (Oxford: Oxford University Press, 1993)
34. HAMILTON, J. D., "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica 57 (1989), 357-84
35. _, Time Series Analysis (Princeton NJ: Princeton University Press, 1994)
36. HANSEN, B. E., "Inference when a Nuisance Parameter Is not Identified under the Null Hypothesis," Econometrica 64 (1996), 413-30
37. _, "Inference in TAR Models," Studies in Nonlinear Dynamics and Econometrics 2 (1997), 1-14
38. HECKSCHER, E. F., "Växelkursens Grundval vid Pappersmyntfot," Ekono-misk Tidskrift 18 (1916), 309-12
39. HEGWOOD, N. D., AND D. H. PAPELL, "Quasi Purchasing Power Parity," International Journal of Finance and Economics 3 (1998), 279-89
40. HENDRY, D. F., "Monte Carlo Experimentation in Econometrics," in Z. Griliches and M. D. Intrilligator, eds., Handbook of Econometrics (Amsterdam: North-Holland, 1984)
41. JANSEN, E. S., AND T. TERÄSVIRTA, "Testing Parameter Constancy and Super Exogeneity in Econometric Equations," Oxford Bulletin of Economics and Statistics 58 (1996), 735-63
42. JOHANSEN, S., "Statistical Analysis of Cointegrating Vectors," Journal of Economic Dynamics and Control 12 (1988), 231-54
43. KOOP, G., M. H. PESARAN, AND S. POTTER, "Impulse Response Analysis in Nonlinear Multivariate Models," Journal of Econometrics 74 (1996), 119-47
44. KRUGMAN, P. R., Exchange Rate Instability (Cambridge, MA: MIT Press, 1989)
45. LOTHIAN, J. R., AND M. P. TAYLOR, "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy 104 (1996), 488-510
46. _ AND _, "Real Exchange Rate Behavior: The Problem of Power and Sample Size," Journal of International Money and Finance 16 (1997), 945-54
47. _ AND _, "Purchasing Power Parity Over Two Centuries: Strengthening the Case for Real Exchange Rate Stability," Journal of International Money and Finance 19 (2000), 759-64
48. LUUKKONEN, R., P. SAIKKONEN, AND T. TERÄSVIRTA, "Testing Linearity Against Smooth Transition Autoregressive Models," Biometrika 75 (1988), 491-99
49. MACKINNON, J., "Critical Values for Cointegration Tests," in R. F. Engle, and C. W. J. Granger, eds., Long-Run Economic Relationships (Oxford: Oxford University Press, 1991)
50. MARK, N., "Real and Nominal Exchange Rates in the Long Run: An Empirical Investigation," Journal of International Economics 28 (1990), 115-36
51. MICHAEL, P., A. R. NOBAY, AND D. A. PEEL, "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy 105 (1997), 862-79
52. OBSTFELD, M., AND K. ROGOFF, "Exchange Rate Dynamics Redux," Journal of Political Economy 103 (1995), 624-60
53. _ AND _, Foundations of International Macroeconomics (Cambridge, MA: MIT Press, 1996)
54. _ AND A. M. TAYLOR, "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies 11 (1997), 441-79
55. O'CONNELL, P. G. J., "Perspectives on Purchasing Power Parity," Ph.D. dissertation, Harvard University, 1997
56. _, "The Overvaluation of Purchasing Power Parity," Journal of International Economics 44 (1998), 1-19
57. _ AND S.-J. WEI, "The Bigger They Are, The Harder They Fall: How Price Differences Between US Cities are Arbitraged," discussion paper, Department of Economics, Harvard University (paper presented at the CEPR-PIES Conference on "Market integration and Real Exchange Rates," Georgetown University, Washington DC, 2-3 May 1997)
58. OFFICER, L. H., Purchasing Power Parity and Exchange Rates: Theory, Evidence and Relevance (Greenwich, CT: JAI Press, 1982)
59. OHANIAN, L. E., AND A. C. STOCKMAN, "Arbitrage Costs and Exchange Rates," discussion paper, Department of Economics, University of Rochester (paper presented at the CEPR-PIES Conference on "Market integration and Real Exchange Rates," Georgetown University, Washington DC, 2-3 May 1997)
60. PAPELL, D. H., "Searching for Stationarity: Purchasing Power Parity Under the Current Float," Journal of International Economics 43 (1998), 313-32
61. PESARAN, M. H., AND S. M. POTTER, "A Floor and Ceiling Model of US Output," Journal of Economic Dynamics and Control 21 (1997), 661-96
62. POTTER, S. M., "Nonlinear Impulse Response Functions," discussion paper, University of California, Los Angeles, 1991
63. ROGOFF, K., "The Purchasing Power Parity Puzzle," Journal of Economic Literature 34 (1996), 647-68
64. SERCU, P., R. UPPAL, AND C. VAN HULLE, "The Exchange Rate in the Presence of Transactions Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance 50 (1995), 1309-19
65. SKALIN, J., "Testing Linearity against Smooth Transition Autoregression Using a Parametric Bootstrap," Working Paper Series in Economics and Finance 276, Department of Economic Statistics, Stockholm School of Economics, 1998
66. _ AND T. TERÄSVIRTA, "Modelling Asymmetries and Moving Equilibria in Unemployment Rates," Working Paper Series in Economics and Finance 262, Department of Economic Statistics, Stockholm School of Economics, 1998
67. TAYLOR, M. P., "An Empirical Examination of Long-Run Purchasing Power Parity Using Cointegration Techniques," Applied Economics 20 (1988), 1369-81
68. _, "The Economics of Exchange Rates," Journal of Economic Literature 33 (1995), 13-47
69. _, AND P. C. MCMAHON, "Long-Run Purchasing Parity in the 1920s," European Economic Review 32 (1988), 179-97
70. _ AND D. A. PEEL, "Nonlinear Mean-Reversion in Real Exchange Rates," mimeo, Department of Economics, University of Oxford, 1998
71. _ AND L. SARNO, "The Behavior of Real Exchange Rates During the Post-Bretton Woods Period," Journal of International Economics 46 (1998), 281-312
72. _ AND _, "Linear and Nonlinear Mean Reversion in Real Exchange Rates: Reconciling the Empirical Evidence," mimeo, Department of Economics, University of Oxford, 1999a
73. _ AND _, "Nonlinearities in European Real Exchange Rate Adjustment," mimeo, Department of Economics, University of Oxford, 1999b
74. TERÄSVIRTA, T., "Specification, Estimation and Evaluation of Smooth Transition Autoregressive Models," Journal of the American Statistical Association 89 (1994), 208-18
75. _, "Modelling Economic Relationships with Smooth Transition Regressions," in D. E. A. Giles, and A. Ullah, eds., Handbook of Applied Economic Statistics (New York: Dekker, 1998)
76. TJOSTHEIM, D., "Estimation in Nonlinear Time Series Models," Stochastic Processes and Their Applications 21 (1986), 251-73
77. TONG, H., Nonlinear Time Series: A Dynamical System Approach (Oxford: Clarendon Press, 1990)
78. WILLIAMS, J. C., AND B. D. WRIGHT, Storage and Commodity Markets (Cambridge: Cambridge University Press, 1991)
79. WU, Y., "Are Real Exchange Rates Non-Stationary?: Evidence from a Panel-Data Test," Journal of Money, Credit and Banking 28 (1996), 54-63