Testing the Purchasing Power Parity Theory: A Case of the Taiwanese Dollar Exchange Rate
From July 1978 to April 1989 Taiwan adopted a snake system by allowing the foreign exchange rate to fluctuate within a narrow band of the centered rate. Using monthly data on the Taiwan dollar/U.S. dollar exchange rate, we show that inference on the purchasing power parity hypothesis is sensitive to whether we incorporate double truncation and autoregressive and moving average error terms into the regression model.
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