Abstract
The purpose of this paper is to apply a symmetric band threshold autoregressive model to investigate the non-linear adjustment of the real pound–dollar rate over a period from 1885 to 2003. After controlling for the Harrod–Balassa–Samuelson effects, we find evidence to support a non-linear mean reversion of the real pound–dollar rate. Moreover, the estimated half-life is about two years with large shocks. We therefore provide a solution to the purchasing power parity puzzle.
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