English, Article, Journal or magazine article edition: The Law of One Price: Nonlinearities in Sectoral Real Exchange Rate Dynamics Luciana Juvenal; Mark P. Taylor

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • The Law of One Price: Nonlinearities in Sectoral Real Exchange Rate Dynamics
Author
  • Luciana Juvenal
  • Mark P. Taylor
Physical Description
  • preprint
Notes
  • Using Self-Exciting Threshold Autoregressive Models (SETAR), this paper explores the validity of the Law of One Price (LOOP) for nineteen sectors in ten European countries. We find strong evidence of nonlinear mean reversion in deviations from the LOOP. We highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to solve the PPP Puzzle. Using the US dollar as a reference currency, half-life estimates range from nine to sixteen months (country averages), which are significantly lower than the `consensus estimates' of three to five years. The results also show that transaction costs differ enormously across sectors and countries
  • Law of One Price, mean reversion, nonlinearities, thresholds
  • RePEc:mmf:mmfc06:80
Language
  • English
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