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Applied Economics Volume 39, 2007 - Issue 19
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Original Articles

Are real exchange rates nonlinear with a unit root? Evidence on PPP for Italy: a note

Paresh Kumar Narayan School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood, Victoria 3125, AustraliaCorrespondence[email protected]
&
Seema Narayan Centre for Policy Studies, Monash University, Clayton 3800, Melbourne, Australia
Pages 2483-2488 | Published online: 11 Apr 2011
 
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Abstract

In this article, we apply the recently developed threshold autoregression model to examine both linearity and stationarity of Italy's real exchange rate vis-à-vis her six trading partner (G6) countries. Our main finding is that Italy's real exchange rate is a nonlinear process that is not characterized by a unit root process for five of six trading partner countries. This provides strong support for purchasing power parity.

Acknowledgement

I am grateful to Bruce Hansen for making available his GAUSS codes for the TAR model, which were modified for the present exercise. However, any remaining errors are my own.

Notes

1 See also Taylor and Taylor (2004) for an excellent tour on PPP including discussions on nonlinearities in real exchange rates.

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