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Nonlinearity and structural breaks in Irish PPP relationships: an application of random field regression

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Using nominal and real exchange rates for Ireland relative to Germany and the UK from 1975 to 2003, this article explores likely sources of nonlinearity in Purchasing Power Parity (PPP) relationships and difficulties in employing an I(1)/I(0) econometric framework. Tests for fractional integration and nonlinearity, including random field regression-based procedures, are applied. Results reveal shortcomings in the standard cointegration and smooth transition autoregression approaches to modelling, and point to multiple structural changes models. Such a model for the case of Ireland and Germany suggests that PPP holds not only in the long-run but also in the medium to short term.

Document Type: Research Article


Affiliations: 1: University of Ulster, Coleraine, Co. Londonderry, BT52 1SA, United Kingdom 2: School of Economics, University College Dublin, Dublin 4, Ireland 3: European Central Bank, Germany

Publication date: 2011-06-01

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