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

Derek Bond, Michael J. Harrison, Edward J. O'Brien

Research output: Contribution to journalArticlepeer-review

Abstract

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 fractionalintegration 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.
Original languageEnglish
Pages (from-to)1899-1911
JournalApplied Economics
Volume43
Issue number15
DOIs
Publication statusPublished (in print/issue) - 1 Jun 2011

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