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Nonlinear PPP Deviations: A Monte Carlo Investigation of Their Unconditional Half-Life

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  • Lo Ming Chien

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    (St. Cloud State University)

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    Abstract

    Recent research has generated support of the notion that the real exchange rate adjustment is nonlinear and that the PPP half-life is faster than the puzzling 3 to 5 years based on linear models. While different nonlinear models survive the specification tests against linear ones, there is little consensus on which specific threshold-type model outperforms the others in the family. In this paper, a Monte Carlo study is designed to address the issue and the findings support that the MR-LSTAR process is the most likely suspect that generates the puzzle.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

    Volume (Year): 12 (2008)
    Issue (Month): 4 (December)
    Pages: 1-31

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    Handle: RePEc:bpj:sndecm:v:12:y:2008:i:4:n:5

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    Cited by:
    1. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2011. "PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-sectional Dependency and Structural Breaks," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1135, Koc University-TUSIAD Economic Research Forum.
    2. Woo, Kai-Yin & Lee, Shu-Kam & Chan, Alan, 2014. "Non-linear adjustments to intranational PPP," Journal of Macroeconomics, Elsevier, Elsevier, vol. 40(C), pages 360-371.

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