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Evidence on purchasing power parity from univariate models: the case of smooth transition trend-stationarity

  • Robert Sollis

Recent research has found that trend-break unit root tests derived from univariate linear models do not support the hypothesis of long-run purchasing power parity (PPP) for US dollar real exchange rates. In this paper univariate smooth transition models are utilized to develop unit root tests that allow under the alternative hypothesis for stationarity around a gradually changing deterministic trend function. These tests reveal statistically significant evidence against the null hypothesis of a unit root for the real exchange rates of a number of countries against the US dollar. However, restrictions consistent with long-run PPP are rejected for some of the countries for which a rejection of the unit root hypothesis is obtained. Copyright © 2005 John Wiley & Sons, Ltd.

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2003 with number 91.

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Date of creation: 27 Sep 2004
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Handle: RePEc:mmf:mmfc03:91
Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  1. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
  2. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  3. Phillip Rothman & Dick van Dijk & Philip Hans Franses, 2000. "A Multivariate STAR Analysis of the Relationship Between Money and Output," Working Papers 0012, East Carolina University, Department of Economics.
  4. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
  5. David Harvey & Terence Mills, 2002. "Unit roots and double smooth transitions," Journal of Applied Statistics, Taylor & Francis Journals, vol. 29(5), pages 675-683.
  6. Anderson, Heather M, 1997. "Transaction Costs and Non-linear Adjustment towards Equilibrium in the US Treasury Bill Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 465-84, November.
  7. Sollis, Robert & Leybourne, Stephen & Newbold, Paul, 2002. "Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 686-700, August.
  8. Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, vol. 91(2), pages 299-323, August.
  9. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November.
  10. Papell, David H., 2002. "The great appreciation, the great depreciation, and the purchasing power parity hypothesis," Journal of International Economics, Elsevier, vol. 57(1), pages 51-82, June.
  11. Leybourne, Stephen J. & Mizen, Paul, 1999. "Understanding the disinflations in Australia, Canada and New Zealand using evidence from smooth transition analysis," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 799-816, October.
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