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Price Indices and Nonlinear Mean‐Reversion of Real Exchange Rates
Author(s) -
Wu JyhLin,
Chen PeiFen
Publication year - 2006
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.2325-8012.2006.tb00781.x
Subject(s) - purchasing power parity , autoregressive model , mean reversion , economics , econometrics , impulse response , exchange rate , shock (circulatory) , nonlinear system , mathematics , monetary economics , physics , medicine , mathematical analysis , quantum mechanics
The purpose of this article is to apply a symmetric band‐threshold autoregressive model to investigate several interesting issues regarding purchasing power parity (PPP). We find that the nonlinear adjustment toward PPP is sensitive to price indices and is supported if a traded‐goods real exchange rate is applied. Moreover, we also uncover the sources of the real exchange rate adjustments toward PPP. Finally, our evidence points out that the estimated half‐life with a large shock, based on a generalized impulse response function, can be explained by nominal rigidities.