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A nonparametric measure of convergence towards purchasing power parity
Author(s) -
Shintani Mototsugu
Publication year - 2006
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.867
Subject(s) - purchasing power parity , econometrics , nonparametric statistics , economics , lyapunov exponent , measure (data warehouse) , parity (physics) , convergence (economics) , empirical measure , nonlinear system , rate of convergence , exchange rate , mathematics , computer science , statistics , macroeconomics , computer network , channel (broadcasting) , physics , management , particle physics , quantum mechanics , database , chaotic
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.