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Nonlinear Purchasing Power Parity under the Gold Standard

2004; Wiley; Volume: 71; Issue: 2 Linguagem: Inglês

10.1002/j.2325-8012.2004.tb00641.x

2325-8012

Iván Payá, David Peel,

Complex Systems and Time Series Analysis

Hegwood and Papell (2002) conclude on the basis of analysis in a linear framework that long‐run purchasing power parity (PPP) does not hold for 16 real exchange rate series, which were analyzed in Diebold. I lusted, and Rush (1991) for the period 1792‐1913 under the Gold Standard. Rather, PPP deviations are mean‐reverting to a changing equilibrium—a quasi PPP (QPPP) theory. We analyze the real exchange rate adjustment mechanism for their data set assuming a nonlinear adjustment process allowing for both a constant and a mean shifting equilibrium. Our results confirm that real exchange rates at that time were stationary, symmetric, nonlinear processes that revert to a nonconstant equilibrium rate. Speeds of adjustment were much quicker when breaks were allowed.