Transactions Costs and Nonlinear Adjustment in Real Exchange Rates; An Empirical Investigation
Year: 1997
Type: article
Abstract: Eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity (PPP). Conventional cointegration tests, Which ignore the effect of transactions costs, may be biased against the long‐run PPP hypothesis. Our results, using both monthly data for the interwar period and annual data spanning two centuries, clearly reject the linear framework in favor of an exponential smooth transition autoregressive process. The systematic pattern in the estimates of the nonlinear models provides strong evidence of mean‐reverting behavior for PPP deviations and helps explain the mixed results of previous studies
Source: Journal of Political Economy
DOI: 10.1086/262096
Authors: Panos Michael, A. Robert Nobay, David A. Peel
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2085916232