Kim, Hyeongwoo and Moh, Young-Kyu (2010): Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment.
Download (349kB) | Preview
This paper revisits the empirical evidence of purchasing power parity under the current float by the recursive mean adjustment (RMA) method (So and Shin, 1999). We first demonstrate superior finite sample performance of the RMA-based unit root test over the augmented Dickey-Fuller test via Monte Carlo experiments for 18 linear and nonlinear autoregressive data generating processes. The RMA-based unit root test rejects the null hypothesis of unit root for 16 out of 20 current float real exchange rates relative to the US dollar.We also find that the computationally simple RMA-based asymptotic confidence interval can provide useful information regarding the half-life of the real exchange rate.
|Item Type:||MPRA Paper|
|Original Title:||Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment|
|Keywords:||Recursive Mean Adjustment; Finite Sample Performance; Purchasing Power Parity; Half-Life|
|Subjects:||C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Dr. Hyeongwoo Kim|
|Date Deposited:||15. May 2010 14:26|
|Last Modified:||16. Feb 2013 08:51|
Donald W. K. Andrews (1993), "Exactly median-unbiased estimation of first order autoregressive/unit root models," Econometrica 61, 139-65.
Donald W. K. Andrews and Hong-Yuan Chen (1994), "Approximately median-unbiased estimation of autoregressive models," Journal of Business and Economic Statistics 12, 187-204.
Chi-Young Choi and Young-Kyu Moh (2007), "How useful are tests for unit-root in distinguishing unit-root processes from stationary but non-linesr processes?" Econometrics Journal 10, 82-112.
Chi-Young Choi, Nelson C. Mark, and Donggyu Sul (2009), "Bias reduction in dynamic panel data models by common recursive mean adjustment," Oxford Bulletin of Economics & Statistics, forthcoming.
Steven Cook (2002), "Correcting size distortion of the dickey-fuller test via recursive mean adjustment," Statistics & Probability Letters 60, 75-79.
Bradley Efron and Robert J. Tibshirani (1993), An Introduction to the Bootstrap, Chapman and Hall/CRC, London, UK.
Alastair Hall (1994), "Testing for a unit root in time series with pretest data-based model selection," Journal of Business and Economic Statistics 12, 461-470.
Bruce E. Hansen (1999), "The grid bootstrap and the autoregressive model," Review of Economics and Statistics 81, 594-607.
M. G. Kendall (1954), "Note on bias in the estimation of autocorrelation," Biometrika 41, 403-404.
Christian J. Murray and David H. Papell (2002), "The purchasing power parity persistence paradigm," Journal of International Economics 56, 1-19.
Serena Ng and Pierre Perron (2001), "Lag length selection and the construction of unit root tests with good size and power," Econometrica 69, 1519-1554.
Paul G. J. O'Connell (1998), "The overvaluation of purchasing power parity," Journal of International Economics 44, 1-19.
Peter C. B. Phillips and Donggyu Sul (2003), "Dynamic panel estimation and homogeneity testing under cross section dependence," Econometrics Journal 6, 217-260.
Kenneth Rogoff (1996), "The purchasing power parity puzzle," Journal of Economic Literature 34, 647-668.
Barbara Rossi (2005), "Confidence intervals for half-life deviations from purchasing power parity," Journal of Business and Economic Statistics 23, 432-442.
Paul Shaman and Robert A. Stine (1988), "The bias of autoregressive coefficient estimators," Journal of the American Statistical Association 83, 842-848.
Dong Wan Shin and Beong Soo So (2001), "Recursive mean adjustment for unit root tests," Journal of Time Series Analysis 22, 595-612.
Beong Soo So and Dong Wan Shin (1999), "Recursive mean adjustment in time-series inferences," Statistics & Probability Letters 43, 65-73.
Donggyu Sul, Peter C. B. Phillips, and Chi-Young Choi (2005), "Prewhitening bias in HAC estimation," Oxford Bulletin of Economics & Statistics 67, 517-546.
Katsuto Tanaka (1984), "An asymptotic expansion associated with the maximum likelihood estimators in ARMA models," Journal of the Royal Statistical Society, Ser. B 46, 58-67.
Alan M. Taylor (2002), "A century of purchasing power parity," Review of Economics and Statistics 84, 139--150.
Robert Taylor (2002), "Regression-based unit root tests with recursive mean adjustment for seasonal and nonseasonal time series," Journal of Business and Economic Statistics 20, 269-281.