Investigating nonlinear purchasing power parity during the post-Bretton Woods era – A Bayesian exponential smooth transition VECM approach

Abstract

This paper proposes a Bayesian procedure to investigate the purchasing power parity (PPP) utilizing an exponential smooth transition vector error correction model (VECM). Employing a simple Gibbs sampler, we jointly estimate the cointegrating relationship along with the nonlinearities caused by the departures from the long-run equilibrium. By allowing for nonlinear regime changes, we provide strong evidence that PPP holds between the US and each of the remaining G7 countries. The model we employed implies that the dynamics of the PPP deviations can be rather complex, which is attested to by the impulse response analysis.

Citation

Gefang, D. (2008), "Investigating nonlinear purchasing power parity during the post-Bretton Woods era – A Bayesian exponential smooth transition VECM approach", Chib, S., Griffiths, W., Koop, G. and Terrell, D. (Ed.) Bayesian Econometrics (Advances in Econometrics, Vol. 23), Emerald Group Publishing Limited, Leeds, pp. 471-500. https://doi.org/10.1016/S0731-9053(08)23014-8