PURCHASING POWER PARITY, PRODUCTIVITY DIFFERENTIALS AND NON‐LINEARITY*

In: The Manchester School, Band 77, Heft 3, S. 271-287

Abstract

The purpose of this paper is to apply a symmetric band threshold autoregressive model to investigate the non‐linear adjustment of the real pound–dollar rate over a period from 1885 to 2003. After controlling for the Harrod–Balassa–Samuelson effects, we find evidence to support a non‐linear mean reversion of the real pound–dollar rate. Moreover, the estimated half‐life is about two years with large shocks. We therefore provide a solution to the purchasing power parity puzzle.