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The Process Followed By Ppp Data. On The Properties Of Linearity Tests

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  • Ivan Paya

    (Universidad de Alicante)

  • David A. Peel

    (University Management School)

Abstract

Recent research has reported the lack of correct size in stationarity test for PPP deviations within a linear framework. However, theoretically well motivated nonlinear models, such as the ESTAR, appear to parsimoniously fit the PPP data and provide an explanation for the PPP ¿puzzle¿. Employing Monte Carlo experiments we analyze the size and power of the nonlinear tests against a variety of nonstationary hypotheses. We also fit the ESTAR model to data from high inflation economies. Our results provide further support for ESTAR specification.

Suggested Citation

  • Ivan Paya & David A. Peel, 2005. "The Process Followed By Ppp Data. On The Properties Of Linearity Tests," Working Papers. Serie AD 2005-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2005-23
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    Cited by:

    1. Bevilacqua, Franco, 2006. "Random walks and cointegration relationships in international parity conditions between Germany and USA for the Bretton-Woods period," MERIT Working Papers 2006-016, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    2. Gawon Yoon, 2010. "Nonlinear mean-reversion to purchasing power parity: exponential smooth transition autoregressive models and stochastic unit root processes," Applied Economics, Taylor & Francis Journals, vol. 42(4), pages 489-496.
    3. Yamin Ahmad & Stuart Glosser, 2011. "Searching for nonlinearities in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 43(15), pages 1829-1845.
    4. Mohsen Bahmani-Oskooee & Ali Kutan & Su Zhou, 2009. "Towards solving the PPP puzzle: evidence from 113 countries," Applied Economics, Taylor & Francis Journals, vol. 41(24), pages 3057-3066.
    5. Mohsen Bahmani‐Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less‐Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.
    6. Michael Frömmel & Darko B. Vukovic & Jinyuan Wu, 2022. "The Dollar Exchange Rate, Adjustment to the Purchasing Power Parity, and the Interest Rate Differential," Mathematics, MDPI, vol. 10(23), pages 1-17, November.
    7. Bevilacqua, Franco, 2006. "Random walks and cointegration relationships in international parity conditions between Germany and USA for the post Bretton-Woods period," MERIT Working Papers 2006-012, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    8. Mohsen Bahmani-Oskooee & Omid Ranjbar, 2016. "Quantile unit root test and PPP: evidence from 23 OECD countries," Applied Economics, Taylor & Francis Journals, vol. 48(31), pages 2899-2911, July.
    9. Sanusi, Aliyu Rafindadi, 2010. "Exchange rate pass-through to consumer prices in Ghana: Evidence from structural vector auto-regression," MPRA Paper 29491, University Library of Munich, Germany.
    10. Yoon, Gawon, 2010. "Do real exchange rates really follow threshold autoregressive or exponential smooth transition autoregressive models?," Economic Modelling, Elsevier, vol. 27(2), pages 605-612, March.
    11. Efthymios Pavlidis & Ivan Paya & David Peel, 2010. "Further empirical evidence on the consumption-real exchange rate anomaly," Working Papers 447022, Lancaster University Management School, Economics Department.

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    More about this item

    Keywords

    ESTAR; Real Exchange Rate; Size; Linearity Test.;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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