Empirical Investigation of Long Run PPP Hypothesis: The Case of Temporary Structural Break and Asymmetric Adjustment

Purchasing Power Parity under Tourism Price Indices: An Analysis for Euro Area

“…Nonlinear dynamics of real exchange rates can arise when under general exchange rate misalignments central bank interventions trigger decisive coordination signals among the main traders to enter the market and rectify the exchange rate deviations. In addition, permanent departures from PPP standards can be induced by divergent productivity shocks, shocks from fundamental economic crises, diverse shocks from monetary and fiscal policy or due to structural metamorphosis of economies (Taylor & Taylor, 2004;Abioglu & Hasanov, 2021).…”

“…Calculations by Vo and Vo (2020) reveal that for the 7 most important international currencies the PPP dictum is valid at a horizon longer than 5 years. Furthermore, Abioglu and Hasanov (2021) emphasize that shifts in the levels of real exchange rates due to a variety of shocks are only a transitory phenomenon; in the long run, the equilibrium PPP rates tend to remain intact. After a proper specification of nonlinearities and structural breaks their analysis of the trade-weighted real effective exchange rates of 60 countries shows that in the long run the examined real exchange rates are capable of reverting to their pre-shock PPP trajectories.…”