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Real exchange rate stationarity in Latin America and relative purchasing power parity: A regime switching approach

Abstract
This paper tests for long-run purchasing power (PPP) among a sample of six Latin American economies. The key contribution of this paper is in terms of the econometric methodology where non-stationarity of the real exchange rate is tested within a Markov regime-switching framework. In contrast to existing studies, this paper defines two new concepts of PPP where one allows for the possibility that real exchange behaviour either switches between stationary and non-stationary regimes (partial PPP), or switches between stationary regimes characterised by differing degrees of persistence (varied PPP). Whereas standard univariate unit root testing suggests that Latin American real exchange rates are generally non-stationary, employment of the regime-switching methodology indicates that most of the sample is characterised by the existence of two distinct stationary regimes. Further analysis indicates that the high rates of inflation and exchange rate volatility experienced in Latin American have given some impetus towards facilitating long-run PPP.
Type
Journal Article
Type of thesis
Series
Citation
Holmes, M. (2008). Real exchange rate stationarity in Latin America and relative purchasing power parity: A regime switching approach. Open Economies Review, 19(2), 261-275.
Date
2008
Publisher
Springer New York
Degree
Supervisors
Rights
Publisher version