How well does nonlinear mean reversion solve the PPP puzzle?
AbstractThis paper addresses the degree to which models which exhibit nonlinear mean reversion (NMR) present a resolution to the Purchasing Power Parity Puzzle. This paper develops a method of estimating a representative distribution of half lives which is based upon the observed distribution of shocks in a given time series rather than choosing shock sizes arbitrarily which is the current practice in the literature. This approach is implemented with data on five real exchange rates. The empirical analysis shows that half lives shorter than the consensus are observed frequently enough to support the proposition that NMR is a solution to the PPP puzzle.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 29 (2010)
Issue (Month): 5 (September)
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Web page: http://www.elsevier.com/locate/inca/30443
C22 F31 Nonlinear impulse response analysis Purchasing power parity Half life Smooth transition autoregressive model Real exchange rates;
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