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Nonlinear mean-reversion in real exchange rates : toward a solution to the purchasing power parity puzzles
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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 0020-6598.
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Official URL: http://dx.doi.org/10.1111/1468-2354.00144
Abstract
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 | ||||
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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. | ||||
ISSN: | 0020-6598 | ||||
Official Date: | 2001 | ||||
Dates: |
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Volume: | 42 | ||||
Number: | 4 | ||||
Number of Pages: | 28 | ||||
Page Range: | pp. 1015-1042 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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