Purchasing power parity and the real exchange rate in Bangladesh : a nonlinear analysis

The long-run purchasing power parity (PPP) hypothesis is examined using data for Bangladesh and four trading partners - the US, Euro area, Japan and India - during the period 1994 to 2002. We apply recently developed nonlinear econometric techniques and provide strong evidence for highly nonlinear mean-reversion of real bilateral Bangladesh taka exchange rates toward a stable long-run equilibrium. Our findings imply strong support for the validity of long-run PPP as well as well for the theoretical models that predict nonlinear adjustment in real exchange rates. (J Asia Pac Econ/GIGA)