Can non-linear real shocks explain the persistence of PPP exchange rate disequilibria?
Peltonen, Tuomas A., Popescu, Adina and Sager, Michael. (2011) Can non-linear real shocks explain the persistence of PPP exchange rate disequilibria? International Journal of Finance & Economics, Vol.16 (No.3). pp. 290-306. ISSN 1099-1158Full text not available from this repository.
Official URL: http://dx.doi.org/10.1002/ijfe.426
A core stylized fact of the empirical exchange rate literature is that half-life deviations of equilibrium real exchange rates from levels implied by Purchasing Power Parity (PPP) are very persistent. Empirical efforts to explain this persistence typically proceed along two distinct paths, resorting either to the presence of real shocks such as productivity differentials that drive equilibrium exchange rates away from levels implied by PPP, or the presence of non-linearities in the adjustment process around PPP. By contrast, we combine these two explanations in the context of an innovative panel estimation methodology. We conclude that both explanations are relevant to the behavior of exchange rates and that resulting half-lives are much shorter than estimated using linear PPP and more consistent with the observed volatility of nominal and real exchange rates.
|Item Type:||Journal Article|
|Subjects:||H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Q Science > QA Mathematics
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Purchasing power parity, Foreign exchange rates, Foreign exchange -- Mathematical models, Nonlinear functional analysis|
|Journal or Publication Title:||International Journal of Finance & Economics|
|Publisher:||John Wiley & Sons, Ltd.|
|Official Date:||July 2011|
|Page Range:||pp. 290-306|
|Access rights to Published version:||Restricted or Subscription Access|
Abuaf N, Jorion P. 1990. Purchasing power in the long run. Journal of Finance 45: 157–174.
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