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Nonlinear adjustment towards purchasing power parity: the Swiss Franc-German Mark case

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  • Roger Guerra
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    Abstract

    We test the hypothesis of nonlinear adjustment towards the purchasing power parity as suggested by Dumas' (1992) model. We estimate a stable exponential smooth transition regression model (ESTAR) for the Swiss franc/German mark exchange rate over the 1960-1998 period, where the adjustment to the steady state takes place rapidly. The results reveal that, for small deviations, the real exchange rate is best described by a random walk, whereas for larger deviations the real exchange rate is clearly mean-reverting. The same results are found when the sample is reduced to cover only the post Bretton-Woods period. A Monte Carlo simulation shows that our nonlinear models are clearly stable. When the real exchange rate is outside the no-arbitrage band, the estimated deviation half-lives are about 1.5 and 2.5 years for respectively the entire and the restricted sample.

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    Bibliographic Info

    Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

    Volume (Year): 139 (2003)
    Issue (Month): I (March)
    Pages: 83-100

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    Handle: RePEc:ses:arsjes:2003-i-4

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    Keywords: Purchasing power parity; nonlinearity; STAR models;

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    7. Christopher F. Baum & Mustafa Caglayan & John Barkoulas, 1998. "Nonlinear Adjustment to Purchasing Power Parity in the post-Bretton Woods Era," Boston College Working Papers in Economics 404., Boston College Department of Economics, revised 16 Nov 1999.
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