Further evidence on purchasing power parity over two centuries with multiple changes in persistence

Abstract

By allowing for multiple changes in persistence, this note shows that the US/UK real exchange rate spanning two centuries is stationary. This result is consistent with the previous one in Lothian and Taylor (1996, 2000) and purchasing power parity is a useful approximation in the long run.

Acknowledgement

This work was supported by research program 2006 of Kookmin University in Korea. I would like to thank Tae-Hwan Kim for kindly providing me with his GAUSS program.

Notes

¹ An evaluation of the nonlinear models is done in Rapach and Wohar (2003), which is a working paper version of Rapach and Wohar (2006).

² For simplicity, λT will be used instead of ⌊λT⌋, which denotes the integer part of λT.

³ For 4 ≤ p _max ≤ 7, the results are the same. For 0 ≤ p _max ≤ 3, the results are even stronger; the first 196 observations up to 1986 are found to be I(0).

⁴ No testing procedure is available for the estimated regime shift dates in Leybourne et al. (2005).