This article examines and solves an interesting paradox in the literature that the tests for purchasing power parity (PPP) based on the yen real exchange rates (RERs) refute the PPP hypothesis more often than those with other major currency-based RERs, and the evidence is sensitive
to the sample period used. Using a new empirical methodology accounting for both nonlinearity and multiple smooth temporary breaks in the data, we show that the puzzling finding is due to the failure to take into account the long but temporary large rise and fall in the yen RERs. The results
illustrate that the yen RERs in the post-Bretton Woods period are likely mean reverting with linear or nonlinear adjustment toward large, long swing type of infrequent smooth temporary changes around constant equilibrium values, supporting the validity of PPP and resolving the paradox.
No Reference information available - sign in for access.
No Citation information available - sign in for access.
No Supplementary Data.
unit root tests;
yen real exchange rates
Document Type: Research Article
Department of Economics, University of Texas at San Antonio, San Antonio, TX, 78249-0633, USA
Department of Economics, Southern Illinois University Edwardsville, Edwardsville, IL, 62026-1102, USA
Publication date: 2014-04-03
More about this publication?