Purchasing power parity over two centuries: trends and nonlinearity

Abstract

In two recent contributions Lothian and Taylor, and Cuddington and Liang, produced empirical evidence that annual data for the dollar-sterling real exchange rate spanning two centuries exhibited a non-linear deterministic trend. This trend could be proxying Harrod-Balassa-Samuelson effects. Lothian and Taylor showed that a linear stationary autoregressive mode, which embodied a cubic trend, implied much faster mean reversion of the real exchange rate to shocks than a model that excluded the trend. This article shows that both non-linearity and a deterministic trend can be allowed for in a theoretically appealing manner and that the fitted models provide a parsimonious explanation of both the dollar-sterling and franc-sterling real exchange rates over the two centuries of data. Generalized impulse response function analysis of the models demonstrates that the speed of adjustment to shocks can be even faster when trends are considered.

Revisiting purchasing power parity in Eastern European countries: quantile unit root tests

“…Empirical evidence on the stationarity of real exchange rates is abundant but inconclusive thus far. Previous studies by MacDonald and Taylor (1992), Taylor (1995), Taylor (2006), Peel and Venetis (2003), Lothian and Taylor (2000), Sarno and Taylor (2002), Taylor and Taylor (2004), Sjolander (2007), Bahmani-Oskooee et al (2008), Bahmani-Oskooee and Hegerty (2009), Chang and Tzeng (2013), He and Chang (2013), He et al (2014) and Bahmani-Oskooee et al (2014)have provided in-depth information on its theoretical and empirical aspects. However, the above tests usually focus on the average behavior of real exchange rate without considering the influence of various sizes of shocks on real exchange rate.…”

Interrelationships among stock prices of Taiwan and Japan and NTD/Yen exchange rate

“…It was found that the generalized approach significantly gives more realistic results, particularly for those markets with closest geographical and economic links. Other literature applying G-IRF for the interactions among variables can also be found in Ewing (2003), Peel and Venetis (2003) and Hacker and Hatemi-J (2003).…”

New evidence on nominal exchange rate predictability

“…Their arguments are also underscored by recent empirical findings with long historical data (e.g. Lothian, 1990;Cuddington and Liang, 2000;Lothian andTaylor, 2000, 2008;Taylor, 2002;Peel and Venetis, 2003;Taylor and Taylor, 2004). However, Bergin et al (2006) point out that ''the HBS effect has not always been a fact of economic life, and appears to be a phenomenon of only the postwar period.''…”