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Non-linear adjustments to intranational PPP

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  • Woo, Kai-Yin
  • Lee, Shu-Kam
  • Chan, Alan

Abstract

We study the intranational purchasing power parity (PPP) between 17 pairs of Canadian cities for the period 1984–2010, using multivariate tests of threshold cointegration in a threshold vector error correction model. Our results confirm the existence of cointegration with threshold symmetric and asymmetric adjustment processes toward PPP equilibrium. We also estimate the unconditional half-lives for non-linear PPP deviations to measure PPP persistence. We find that the speed of non-linear mean reversion may be faster than previously thought when allowing non-linear adjustments. In addition, we measure the absorption of shocks and suggest that different types of shocks are absorbed at different rates by different variables in the system. The evidence reveals that there are complex non-linearities in the price data and these justify the use of non-linear methods to study adjustments to intranational PPP.

Suggested Citation

  • Woo, Kai-Yin & Lee, Shu-Kam & Chan, Alan, 2014. "Non-linear adjustments to intranational PPP," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 360-371.
    • Handle: RePEc:eee:jmacro:v:40:y:2014:i:c:p:360-371
    DOI: 10.1016/j.jmacro.2014.01.013
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    Cited by:

    1. Kai-Yin Woo & Shu-Kam Lee & Cho-Yiu Joe Ng, 2018. "An Investigation Into The Dynamic Relationship Between Cpi And Ppi: Evidence From The Uk, France And Germany," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1081-1100, July.
    2. Kai Yin Woo & Shu Kam Lee & Alan T. Y. Chan, 2020. "Food price convergence in Canada: A nonparametric nonlinear cointegration analysis," Economics Bulletin, AccessEcon, vol. 40(3), pages 2361-2371.

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    More about this item

    Keywords

    Multivariate threshold cointegration; Non-linear impulse responses; Mean bias; Unconditional half-life; Absorption of shocks; Canada;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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