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

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  • Roger Guerra

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.

Suggested Citation

  • Roger Guerra, 2003. "Nonlinear adjustment towards purchasing power parity: the Swiss Franc-German Mark case," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(I), pages 83-100, March.
  • Handle: RePEc:ses:arsjes:2003-i-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Purchasing power parity; nonlinearity; STAR models;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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