Purchasing Power Parity: A Nonlinear Multivariate Approach
National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); University of Cergy-Pontoise - THEMA
Melika Ben Salem
Université Paris-Est Marne la Vallée (UPEMLV); Universite Paris Est
University of Copenhagen - Department of Statistics and Operations Research
August 20, 2008
Economics Bulletin, Vol. 6, No. 39, pp. 1-6, 2008
The goal of this paper is to disentangle the respective contributions of the nominal exchange rate and the price differential to the adjustment towards the Purchasing Power Parity relation. To this end, we estimate a threshold vector equilibrium correction model, whose dynamics is consistent with the PPP in presence of trading costs. European data support the relevance of this model for Belgium, France and Italy, but this is not the case for the G7 data against the US Dollar. Furthermore, the adjustment in European countries seems to have been achieved only through nominal exchange rate changes.
Keywords: Real exchange rate, threshold vector equilibrium correction model
JEL Classification: F31, C12, C22Accepted Paper Series
Date posted: March 21, 2009
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