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Testing nonlinearities in purchasing power parity

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  • Imad Moosa

Abstract

This note presents some empirical evidence on the presence of nonlinear adjustment in the PPP relationship. Nonlinearities are shown to be captured by a polynomial in the error correction term. It is also shown that there is some evidence for PPP when the hypothesis is tested over the period of the recent floating using the Yen/DM exchange rate. Using the residual of the cointegrating regression as an error correction term, two error correction models are estimated, and non-nested model selection testing reveals that nonlinear adjustment is predominant.

Suggested Citation

  • Imad Moosa, 1994. "Testing nonlinearities in purchasing power parity," Applied Economics Letters, Taylor & Francis Journals, vol. 1(3), pages 41-43.
    • Handle: RePEc:taf:apeclt:v:1:y:1994:i:3:p:41-43
    DOI: 10.1080/135048594358276
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    References listed on IDEAS

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    Cited by:

    1. Ming-Yuan Leon Li, 2007. "Purchasing power parity under high and low volatility regimes," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 581-589.
    2. Mariam Camarero & Juan Carlos Cuestas & Javier Ordonez, 2008. "Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 30-46.
    3. Moosa, Imad A. & Ma, Ming, 2018. "Linear and Nonlinear Attractors in Purchasing Power Parity," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 71(2), pages 149-172.
    4. Jyh-Lin Wu & Yu-Hau Hu, 2007. "Currency substitution and nonlinear error correction in Taiwan's demand for broad money," Applied Economics, Taylor & Francis Journals, vol. 39(13), pages 1635-1645.

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