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Purchasing Power Parity: A Nonlinear Multivariate Approach

Economics Bulletin, Vol. 6, No. 39, pp. 1-6, 2008

Posted: 21 Mar 2009

See all articles by Frederique Bec

Frederique Bec

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

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research; University of Copenhagen - Department of Economics

Date Written: August 20, 2008

Abstract

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, C22

Suggested Citation

Bec, Frederique and Bec, Frederique and Ben Salem, Melika and Rahbek, Anders, Purchasing Power Parity: A Nonlinear Multivariate Approach (August 20, 2008). Economics Bulletin, Vol. 6, No. 39, pp. 1-6, 2008, Available at SSRN: https://ssrn.com/abstract=1365811

Frederique Bec (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

Melika Ben Salem

Université Paris-Est Marne la Vallée (UPEMLV) ( email )

France

Universite Paris Est ( email )

Batiment Bois de l'Etang
5 rue Galilee
Champs sur Marne, 77420
France

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research

Universitetsparken 5
DK-2100
Denmark
+45 3532 0682 (Phone)

University of Copenhagen - Department of Economics

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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