Can non-linear real shocks explain the persistence of PPP exchange rate disequilibria?

A core stylized fact of the empirical exchange rate literature is that half-life deviationsof equilibrium real exchange rates from levels implied by Purchasing Power Parity(PPP) are very persistent. Empirical efforts to explain this persistence typicallyproceed along two distinct paths, resorting either to the presence of real shocks suchas productivity differentials that drive equilibrium exchange rates away from levelsimplied by PPP, or the presence of non-linearities in the adjustment process aroundPPP. By contrast, we combine these two explanations in the context of an innovativepanel estimation methodology..