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Nonlinear Purchasing Power Parity under the Gold Standard
Author(s) -
Paya Ivan,
Peel David A.
Publication year - 2004
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2004.tb00641.x
Subject(s) - purchasing power parity , nonlinear system , exchange rate , mean reversion , relative purchasing power parity , economics , parity (physics) , econometrics , mathematics , mathematical economics , macroeconomics , physics , particle physics , quantum mechanics
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. I lusted, 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.