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Asymptotic Confidence Intervals for Impulse Responses of Near-Integrated Processes: An Application to Purchasing Power Parity

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  • Nikolay Gospodinov

Abstract

Many economic time series are charecterized by high persistence which typically requires nonstandard limit theory for inference. This paper proposes a new method for constructing confidence intervals for the impulse response functions of nearly nonstationary processes. The method is based on inverting the acceptance region of the LR statistic evaluated under a sequence of null hypotheses of possible values for the impulse response. Under the null, the LR statistic can be represented as a ratio of functionals of Ornstein-Uhlenbeck processes and its asymptotic quantiles can be simulated easily. The method is extended to multivariate processes with near-unit roots. The empirical results for the real exchange rates show some support for 3-5 year half-lives reported by Rogoff (1996).

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 136.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:136

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Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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Keywords: impulse responses; near-integrated processes; local-to-unity asymptotics; purchasing power parity;

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Cited by:
  1. Rossi, Barbara, 2002. "Confidence Intervals for Half-life Deviations from Purchasing Power Parity," Working Papers 02-08, Duke University, Department of Economics.
  2. Sofiane H. Sekioua, 2004. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the dominant root and half-lives of shocks," Money Macro and Finance (MMF) Research Group Conference 2004 91, Money Macro and Finance Research Group.

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