Chaos, self-organized criticality, and SETAR nonlinearity: An analysis of purchasing power parity between Canada and the United States

This paper uses monthly observations for the real exchange rate between Canada and the United States over the recent flexible exchange rate period (from January 1, 1973 to August 1, 2004) to test purchasing power parity between Canada and the United States using unit root and stationarity tests. Moreover, given the apparent random walk behavior in the real exchange rate, various tests from dynamical systems theory, such as for example, the Nychka et al. Nychka DW, Ellner S, Ronald GA, McCaffrey D. Finding chaos in noisy systems. J Roy Stat Soc B 1992;54:399–426] chaos test, the Li Li W. Absence of 1/f spectra in Dow Jones average. Int J Bifurcat Chaos 1991;1:583–97] self-organized criticality test, and the Hansen Hansen, B.E. Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica 1996;64:413–30] threshold effects test are used to distinguish between stochastic and deterministic origin for the real exchange rate.