Linear or Nonlinear Cointegration in the Purchasing Power Parity Relationship?

Haug, Alfred A.; Basher, Syed Abul

Linear or Nonlinear Cointegration in the Purchasing Power Parity Relationship?

Haug, Alfred A.; Basher, Syed Abul

Cite this item: Haug, A. A., & Basher, S. A. (2007). Linear or Nonlinear Cointegration in the Purchasing Power Parity Relationship? (Economics Discussion Papers Series No. 712). Department of Economics, University of Otago. Retrieved from http://hdl.handle.net/10523/867

Permanent link to OUR Archive version: http://hdl.handle.net/10523/867

Date: 2007-08-01

Publisher: Department of Economics, University of Otago

Pages: 23

Series: Economics Discussion Papers Series

Series number: 712

Keywords: PPP; order of integration; nonlinear cointegration.

Research Type: Discussion Paper

Abstract:

We test long-run PPP within a general model of cointegration of linear and nonlinear form. Nonlinear cointegration is tested with rank tests of Breitung (2001). We determine first the order of integration of each variable, using monthly data from the post-Bretton Woods era for G-10 countries. In many cases prices are I(2), whereas all exchange rates are I(1). However, there are several countries that have a price level that linearly cointegrates with the US price level so that this combination is I(1). Overall, we find some, though limited, evidence for nonlinear and also linear cointegration in the PPP model.

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