Long-run purchasing power parity with asymmetric adjustment

Tests of purchasing power parity (PPP) that use panel data are more support ive of the theory than are bilateral tests. The article uses threshold coin tegration to explore long-run PPP Using data from the post-Bretton Woods pe riod, we show that cointegration with threshold adjustment holds for a numb er of European countries on a bilateral basis. Focusing on France and Germa ny as base countries, we show that the error-correction model has important nonlinear characteristics in that prices and the exchange rate have marked ly different adjustment patterns for positive gaps from PPP than negative g aps.