Deviations from purchasing power parity under different exchange rate regimes: Do they revert and, if so, how?

Journal of Banking and Finance

Volumn 30, Issue 11, 2006, Pages 3147-3169

  Sarno, Lucio ^a   Valente, Giorgio ^b  

^a UNIVERSITY OF WARWICK   (United Kingdom)

^b CHINESE UNIVERSITY OF HONG KONG   (Hong Kong)

Author keywords

Exchange rate regimes; Nonlinearity; Purchasing power parity; Real exchange rate

Indexed keywords

EID: 33749593947     PISSN: 03784266     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jbankfin.2005.12.007     Document Type: Article

References (82)

1. Abuaf N., and Jorion P. Purchasing power parity in the long run. Journal of Finance 45 (1990) 157-174
2. Ang, A., Bekaert, G., 1998. Regime Switches in Interest Rates, National Bureau of Economic Research Working Paper No. 6508.
3. Ang A., and Bekaert G. Regime switches in interest rates. Journal of Business and Economic Statistics 20 (2002) 163-182
4. Baum C.F., Caglayan M., and Barkoulas J.T. Nonlinear adjustment to purchasing power parity in the Post-Bretton Woods era. Journal of International Money and Finance 20 (2001) 379-399
5. Baxter M., and Stockman A.C. Business cycles and the exchange rate system. Journal of Monetary Economics 23 (1989) 377-400
6. Calvo G.A., and Reinhart C.M. Fear of floating. Quarterly Journal of Economics 117 (2002) 379-408
7. Chari V.V., Kehoe P.J., and McGrattan E.R. Can sticky price models generate persistent and volatile real exchange rates?. Review of Economic Studies 69 (2002) 533-563
8. Cheung Y.-W., and Lai K.S. Long-run purchasing power parity during the recent float. Journal of International Economics 34 (1993) 181-192
9. Cheung Y.-W., and Lai K.S. Mean reversion in real exchange rates. Economics Letters 46 (1994) 251-256
10. Cheung Y.-W., and Lai K.S. Parity reversion in real exchange rates during the Post-Bretton Woods period. Journal of International Money and Finance 17 (1998) 597-614
11. Cheung Y.-W., Lai K.S., and Bergman M. Dissecting the PPP puzzle: The unconventional roles of nominal exchange rate and price adjustments. Journal of International Economics 64 (2004) 135-150
12. Chib S. Markov chain monte carlo methods: Computation and inference. In: Heckman J.J., and Leamer E. (Eds). Handbook of Econometrics vol. 5 (2001), North Holland, Amsterdam 3569-3649
13. Choudhry T., McNown R., and Wallace M. Purchasing power parity and the Canadian float in the 1950s. Review of Economics and Statistics 73 (1991) 558-563
14. Clarida R.H., Sarno L., Taylor M.P., and Valente G. The Out-of-sample success of term structure models as exchange rate predictors: A step beyond. Journal of International Economics 60 (2003) 61-83
15. Coakley J., and Fuertes A.M. Short run dynamics of real exchange rates. Manchester School 68 (2000) 461-475
16. Coakley J., and Fuertes A.M. Border costs and real exchange rate dynamics in europe. Journal of Policy Modeling 23 (2001) 669-676
17. Coakley J., Flood R., Fuertes A.M., and Taylor M.P. Purchasing power parity and the theory of general relativity: The first tests. Journal of International Money and Finance 24 (2005) 293-316
18. Coe P.J., and Serletis A. Bounds tests of the theory of purchasing power parity. Journal of Banking and Finance 26 (2002) 179-199
19. Corbae D., and Ouliaris S. Cointegration and tests of purchasing power parity. Review of Economics and Statistics 70 (1988) 508-511
20. Dempster A.P., Laird N.M., and Rubin D.B. Maximum likelihood estimation from incomplete data via the EM algorithm. Journal of the Royal Statistical Society 39 Series B (1977) 1-38
21. Diebold F.X., Husted S., and Rush M. Real exchange rates under the gold standard. Journal of Political Economy 99 (1991) 1252-1271
22. Dueker, M., Neely, C.J., 2005. Can Markov Switching Models Predict Excess Foreign Exchange Returns? Federal Reserve Bank of St. Louis Working Paper No. 21B.
23. Dumas B. Dynamic equilibrium and the real exchange rate in spatially separated world. Review of Financial Studies 5 (1992) 53-180
24. Edison H.J. Purchasing Power Parity in the Long Run. Journal of Money, Credit and Banking 19 (1987) 376-387
25. Edison H.J., Gagnon J.E., and Melick W.R. Understanding the empirical literature on purchasing power parity: The Post-Bretton Woods era. Journal of International Money and Finance 16 (1997) 1-17
26. Engel C. Can the markov switching model forecast exchange rates?. Journal of International Economics 36 (1994) 151-165
27. Engel C. Accounting for US real exchange rate changes. Journal of Political Economy 107 (1999) 507-538
28. Engel C. Long-run PPP may not hold after all. Journal of International Economics 51 (2000) 243-273
29. Engel C., and Hamilton J.D. Long swings in the dollar: Are they in the data and do markets know it?. American Economic Review 80 (1990) 689-713
30. Engel C., and Kim C.J. The Long-run US/UK real exchange rate. Journal of Money Credit and Banking 31 (1999) 335-356
31. Engel C., and Morley J.C. The Adjustment of Prices and the Adjustment of the Exchange Rate (2002), University of Wisconsin and Washington University, mimeo
32. Engle R.F., and Granger C.W.J. Co-integration and error correction: Representation, estimation, and testing. Econometrica 55 (1987) 251-276
33. Frankel J.A., and Rose A.K. A panel project on purchasing power parity: Mean reversion within and between countries. Journal of International Economics 40 (1996) 209-224
34. Froot K.A., and Rogoff K. Perspectives on PPP and long-run real exchange rates. In: Rogoff K., and Grossman G. (Eds). Handbook of International Economics (1995), North Holland, Amsterdam
35. Garcia R. Asymptotic null distribution of the likelihood ratio test in markov switching models. International Economic Review 39 (1998) 763-788
36. Goldfajn I., and Valdes R. The aftermath of appreciations. Quarterly Journal of Economics 114 (1999) 229-262
37. Granger C.W.J. Developments in the study of cointegrated variables. Oxford Bulletin of Economics and Statistics 48 (1986) 213-228
38. Hakkio C.S. A re-examination of purchasing power parity: A multi-country and multi-period study. Journal of International Economics 17 (1984) 177-265
39. Hamilton J.D. Estimation, inference and forecasting of time series subject to changes in regime. In: Maddala G.S., Rao C.R., and Vinod H.D. (Eds). Handbook of Econometrics vol. 4 (1993), Elsevier, Amsterdam
40. Hansen B.E. The likelihood ratio test under nonstandard conditions: Testing the Markov switching model of GNP. Journal of Applied Econometrics 7 (1992) S61-S82
41. Hansen H., and Johansen S. Some tests for parameter constancy in cointegrated VAR-models. Econometrics Journal 2 (1999) 306-333
42. Imbs J., Mumtaz H., Ravn M.O., and Rey H. Non linearities and real exchange rate dynamics. Journal of the European Economic Association 1 (2003) 639-649
43. Imbs J., Mumtaz H., Ravn M.O., and Rey H. PPP strikes back: Aggregation and the real exchange rate. Quarterly Journal of Economics 120 (2005) 1-44
44. Johansen S. Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control 12 (1988) 231-254
45. Johansen S. Estimation and hypothesis testing of cointegrating vectors in Gaussian vector autoregressive models. Econometrica 59 (1991) 1551-1580
46. Kim Y. Purchasing power parity in the long run: A cointegration approach. Journal of Money, Credit, and Banking 22 (1990) 491-503
47. Kim C.-J., and Nelson C.R. State-space models with regime switching (1999), MIT Press, Cambridge, Mass. and London, UK
48. Kim, C.-J., Piger, J.M., Startz, R., 2003. Estimation of Markov Regime-Switching Regression Models with Endogenous Switching. Federal Reserve Bank of St. Louis Working Paper No. 2003-015A.
49. Koop G., Pesaran M.H., and Potter S. Impulse response analysis in nonlinear multivariate models. Journal of Econometrics 74 (1996) 119-147
50. Kremers J.J.M., Ericsson N.R., and Dolado J.J. The power of cointegration tests. Oxford Bulletin of Economics and Statistics 54 (1992) 325-348
51. Krolzig H.-M. Markov-Switching Vector Autoregressions (1997), Springer, New York, NY
52. Lane P.R. The new open economy macroeconomics: A survey. Journal of International Economics 54 (2001) 235-266
53. LeBaron B. Forecast improvements using a volatility index. Journal of Applied Econometrics 7 (1992) S137-S149
54. Lothian J.R., and Taylor M.P. Real exchange rate behaviour: The recent float from the perspective of the past two centuries. Journal of Political Economy 104 (1996) 488-510
55. Lothian J.R., and Taylor M.P. Real exchange rate behaviour: The problem of power and sample size. Journal of International Money and Finance 16 (1997) 945-954
56. Mark N.C. Real and nominal exchange rates in the long run: An empirical investigation. Journal of International Economics 28 (1990) 115-136
57. McKinnon R., and Schnabl G. Synchronized business cycles in East Asia: Fluctuations in the yen/dollar exchange rate and China's stabilizing role. World Economy August (2003) 1067-1088
58. McNown R., and Wallace M. National price levels, purchasing power parity, and cointegration: A test of four high inflation economies. Journal of International Money and Finance 8 (1989) 533-545
59. Michael P., Nobay A.R., and Peel D.A. Transactions costs and nonlinear adjustment in real exchange rates: An empirical investigation. Journal of Political Economy 105 (1997) 862-879
60. Nakagawa H. Real exchange rates and real interest differentials: Implications of nonlinear adjustment in real exchange rates. Journal of Monetary Economics 49 (2002) 629-649
61. Obstfeld M., and Taylor A.M. Nonlinear aspects of goods-market arbitrage and adjustment: Heckscher's commodity points revisited. Journal of the Japanese and International Economies 11 (1997) 441-479
62. Obstfeld M., and Taylor A.M. Global Capital Markets: Integration, Crisis, and Growth (2004), Cambridge University Press, Cambridge, UK and New York, USA
63. O'Connell P.G.J. The overvaluation of purchasing power parity. Journal of International Economics 44 (1998) 1-19
64. O'Connell P.G.J., and Wei S.-J. The bigger they are, the harder they fall: Retail Price differences across US cities. Journal of International Economics 56 (2001) 21-53
65. Papell D.H. Searching for stationarity: Purchasing power parity under the current float. Journal of International Economics 43 (1998) 313-332
66. Quintos C.E. Stability tests in error correction models. Journal of Econometrics 82 (1997) 289-315
67. Rogoff K. The purchasing power parity puzzle. Journal of Economic Literature 34 (1996) 647-668
68. Sarno L. Towards a new paradigm in open economy modelling: Where do we stand?. Federal Reserve Bank of St. Louis Review 83 (2001) 21-36
69. Sarno L. Towards a solution to the puzzles in exchange rate economics: Where do we stand?. Canadian Journal of Economics 38 (2005) 673-708
70. Sarno L., and Taylor M.P. Real exchange rates under the recent float: Unequivocal evidence of mean reversion. Economics Letters 60 (1998) 131-137
71. Sarno L., and Taylor M.P. Official intervention in the foreign exchange market: Is it effective and, if so, how does it work?. Journal of Economic Literature 39 (2001) 839-868
72. Sarno L., and Taylor M.P. Purchasing power parity and the real exchange rate. International Monetary Fund Staff Papers 49 (2002) 65-105
73. Sarno L., and Valente M.P. Empirical exchange rate models and currency risk: some evidence from density forecasts. Journal of International Money and Finance 24 (2005) 363-385
74. Sercu P., Uppal R., and Van Hulle C. The exchange rate in the presence of transactions costs: implications for tests of purchasing power parity. Journal of Finance 50 (1995) 1309-1319
75. Serletis A., and Gogas P. Long-horizon regression tests of the theory of purchasing power parity. Journal of Banking and Finance 28 (2004) 1961-1985
76. Siklos P., and Granger C.W.J. Regime-sensitive cointegration with an illustration from interest rate parity. Macroeconomic Dynamics 1 (1997) 640-657
77. Taylor A.M. Potential pitfalls for the purchasing power parity puzzle? Sampling and specification biases in mean reversion tests of the law of one price. Econometrica 69 2 (2001) 473-498
78. Taylor A.M. A century of purchasing-power parity. Review of Economics and Statistics 84 (2002) 139-150
79. Taylor M.P., and McMahon P.C. Long-run purchasing power parity in the 1920s. European Economic Review 32 (1988) 179-197
80. Taylor M.P., and Sarno L. The behaviour of real exchange rates during the Post-Bretton Woods period. Journal of International Economics 46 (1998) 281-312
81. Taylor A.M., and Taylor M.P. The purchasing power parity debate. Journal of Economic Perspectives 18 (2004) 135-158
82. Taylor M.P., Peel D.A., and Sarno L. Nonlinear mean-reversion in real exchange rates: Toward a solution to the purchasing power parity puzzles. International Economic Review 42 (2001) 1015-1042