Economic theory suggests that monetary growth would presumably overshadow real factors in countries experiencing high inflation and supportive evidence for PPP is more likely. Most studies use data of high-inflation countries. This paper revisits the high-inflation hypothesis by investigating the threshold effects of inflation [Caner, M., Hansen, B.E., 2001. Threshold autoregression with a unit root. Econometrica, 69(6), 1555-1596] on the stationarity of the real exchange rate. Using data of 18 low-inflation OECD economies and 36 developing economies, spanning from 1980 to 2001, our empirical evidence conclude that first, the high-inflation argument is generally correct; second, some real exchange rates are nonlinear stationary, rather than non-stationary; finally, PPP is likely in both high- and low-inflation regimes, and more favorable results are found in high-inflation emerging economies.
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