Testing PPP hypothesis under temporary structural breaks and asymmetric dynamic adjustments
- 21 January 2020
- journal article
- research article
- Published by Taylor & Francis in Applied Economics
- Vol. 52 (32) , 3479-3497
Abstract
We test the empirical validity of the PPP proposition under temporary structural breaks and dynamic nonlinear adjustments. Although several testing procedures have recently been proposed in the existing literature to investigate stochastic properties of the series under gradual breaks and nonlinear adjustments, none of these tests are compatible with the PPP proposition. Therefore, we propose new testing procedures that restrict the break to be temporary while simultaneously allowing for asymmetric dynamic nonlinear adjustment towards equilibrium. Using these newly proposed tests, we test stationarity of real exchange rate of 24 OECD countries vis-à-vis USA, and find support in favour of PPP proposition in majority of the countries.Keywords
This publication has 25 references indexed in Scilit:
- A simple unit root test against asymmetric STAR nonlinearity with an application to real exchange rates in Nordic countriesEconomic Modelling, 2009
- Additional Evidence of Long-Run Purchasing Power Parity with Restricted Structural ChangeJournal of Money, Credit and Banking, 2006
- Evidence on purchasing power parity from univariate models: the case of smooth transition trend‐stationarityJournal of Applied Econometrics, 2005
- Asymmetric adjustment and smooth transitions: a combination of some unit root testsJournal of Time Series Analysis, 2004
- Time-Varying Smooth Transition Autoregressive ModelsJournal of Business & Economic Statistics, 2003
- Nonlinear Mean‐Reversion in Real Exchange Rates: Toward a Solution To the Purchasing Power Parity PuzzlesInternational Economic Review, 2001
- Unit roots and smooth transitionsJournal of Time Series Analysis, 1998
- Specification, Estimation, and Evaluation of Smooth Transition Autoregressive ModelsJournal of the American Statistical Association, 1994
- Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated WorldThe Review of Financial Studies, 1992
- An empirical examination of long-run purchasing power parity using cointegration techniquesApplied Economics, 1988