Nonlinear mean-reversion in real exchange rates : toward a solution to the purchasing power parity puzzles
Taylor, Mark P., Peel, David A. and Sarno, Lucio. (2001) Nonlinear mean-reversion in real exchange rates : toward a solution to the purchasing power parity puzzles. International Economic Review, 42 (4). pp. 1015-1042. ISSN 0020-6598Full text not available from this repository.
Official URL: http://dx.doi.org/10.1111/1468-2354.00144
We fit nonlinearly mean-reverting models to real dollar exchange rates over the post-Bretton Woods period, consistent with a theoretical literature on transactions costs in international arbitrage. The half lives of real exchange rate shocks, calculated through Monte Carlo integration, imply faster adjustment speeds than hitherto recorded. Monte Carlo simulations reconcile our results with the large empirical literature on unit roots in real exchange rates by showing that when the real exchange rate is nonlinearly mean reverting, standard univariate unit root tests have low power, while multivariate tests have much higher power to reject a false null hypothesis.
|Item Type:||Journal Article|
|Subjects:||H Social Sciences > HC Economic History and Conditions|
|Divisions:||Faculty of Social Sciences > Warwick Business School|
|Journal or Publication Title:||International Economic Review|
|Publisher:||Wiley-Blackwell Publishing, Inc.|
|Number of Pages:||28|
|Page Range:||pp. 1015-1042|
|Access rights to Published version:||Restricted or Subscription Access|
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