Zanetti Chini, Emilio (2010): Updating the PPP puzzle: should we use nonlinear models?
This is the latest version of this item.

PDF
MPRA_paper_37418.pdf Download (1MB)  Preview 
Abstract
We investigate the empirical support to the Purchasing Power Parity hypothesis in sixteen real exchange rates for the decade 19992009 by implementing Cointegrated VAR analysis, panel cointegration and nonlinear models. The theory is ejected and both the puzzles remain unsolved if considering linear models, while a nonlinear scenario seems to allow for a partial solution to the puzzle if adopting a modified GeneraltoSpecific modelling strategy. The parameters restrictions commonly used in literature and the automatic use of symmetric transitions between different regimes when estimating the conditional mean are criticized and shown being two plausible candidates for explaining the puzzle.
Item Type:  MPRA Paper 

Original Title:  Updating the PPP puzzle: should we use nonlinear models? 
Language:  English 
Keywords:  PPP, real exchange rates, dynamically symmetric models, STAR models, model specification 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C32  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C50  General C  Mathematical and Quantitative Methods > C2  Single Equation Models ; Single Variables > C22  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes F  International Economics > F3  International Finance > F31  Foreign Exchange 
Item ID:  37418 
Depositing User:  Emilio Zanetti Chini 
Date Deposited:  19. Mar 2012 01:24 
Last Modified:  01. May 2015 22:42 
References:  Banerjee, A., Marcellino, M. and Osbat, C. (2005). Testing for PPP: Should we use panel methods? Empirical Economics, 30, 77–91, DOI: 10.1007/s0018100402228. Coleman, A. (1995). Arbitrage, Storage and the Law of One Price: New Theory for the Time Series Analysis of an Old Problem. Discussion Paper. Department of Economics. Princeton University. Dennis, J., Hansen, H., Johansen, S. and Juselius, K. (2006). CATS in RATS. Cointegration Analysis of Time Series, Version 2. Estima: Evanston. Eitrheim, O. and Teräsvirta, T. (1996). Testing the adequacy of smooth transition autoregressive models. Journal of Econometrics,74, 59–75, DOI: 10.1016/03044076(95)017518. Elliott, G., Rothemberg, T. and Stock, J. (1996). Efficient Tests for an Autoregressive Unit Root. Econometrica, 64, 813–836. Gadea, M. and Mayoral, L. (2009). Aggregation is Not the Solution: The PPP Strikes Back. Journal of Applied Econometrics, 24, 875–894, DOI: 10.1002/jae.1078. Gallant, A., Rossi, P. and Tauchen, G. (1993). Nonlinear Dynamic Structures. Econometrica, 61, 871–907. Granger, C. and Teräsvirta, T. (1993). Modelling Nonlinear Economic Relationships. Oxford: Oxford University Press. Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. Econometrics Journal, 3, 148–161, DOI: 10.1111/1368423X.00043. Hansen, B. (1996). Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica, 64, 413–30. Hinich, M. (1996). Testing for dependence in the input to a linear time series model. Journal of Nonparametric Statistic, 6, 205–221, DOI: 10.1080/10485259608832672. Im, K., Pesaran, M. and Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53–74. Imbs, J., Muntaz, H., Ravn, M. and Rey, H. (2005). PPP Strikes Back: Aggregation and Real Exchange Rate. Quarterly Journal of Economics, 120 (1), 1–43. Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vectors Autoregressive Models. Econometrica., 59, 1551–1580. Johansen, S. (2002). A small sample correction for tests of hypotheses on the cointegrated vectors. Journal of Econometrics, 111, 195–221. Johansen, S., Juselius, K., Frydman, R. and Goldberg, M. (2010). Testing hypotheses in an I(2) model with piecewise linear trends. An analysis of the persistent long swings in the Dmk/$ rate. Journal of Econometrics, 158, 117–129, DOI: 10.1016/j.jeconom.2010.03.018. Juselius, K. (2006). The Cointegrated VAR Model: Methodology and Applications. Oxford: Oxford University Press. Juselius, K. (2009). The Long Swings Puzzle: What the Data Tell When Allowed to Speak Freely. In K. Patterson and T. Mills (eds.), The Palgrave Handbook of Empirical Econometrics, Macmillan, pp. 367–384. Koop, G., Pesaran, M. and Potter, S. (1996). Impulse Response Analysis in Nonlinear Multivariate Models. Journal of Econometrics, 74, 119–147, DOI: 10.1016/03044076(95)017534. Kwiatkowski, D., Phillips, P., Shmidt, P. and Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54, 159–178, DOI: 10.1016/03044076(92)90104Y. Levin, A., Lin, C. and Chu, C. (2002). Unit root test in panel data: Asymptotic and finite sample properties. Journal of Econometrics, 87, 207–237, DOI: 10.1016/S03044076(01)000987. Luukkonen, R., Saikkonen, P. and Teräsvirta, T. (1988). Testing linearity against smooth transition autoregressive models. Biometrika, 75, 491–499. Maddala, G. and Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61, 631–652, DOI: 10.1111/14680084.0610s1631. McLeod, A. and Li, W. (1983). Diagnostic checking ARMA time series models using squaredresidual autocorrelations. Journal of Time Series Analysis, 4, 269–273, DOI: 10.1111/j.14679892.1983.tb00373.x. Nyblom, J. and Harvey, A. (2000). Tests of Common Stochastic Trends. Econometric Theory, 16, 176–199. Pedroni, P. (2001). Purchasing power parity tests in cointegrated panels. The Review of Economics and Statistics, 83, 727–731, doi:10.1162/003465301753237803. Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20, 597–625, DOI: 10.1017/S0266466604203073. Pesaran, M. (2007). A Simple Panel Unit Root Test for CrossSection Dependance. Journal of Applied Econometrics, 22, 265–312, DOI: 10.1002/jae.951. Rogoff, K. (1996). The Purchasing Power Parity Puzzle. Journal of Economic Literature, 34, 647–668. Sarno, L. and Taylor, M. (2001). Purchasing Power Parity and the Real Exchange Rates. CEPR Discussion Papers 2913. Taylor, M., Peel, D. and Sarno, L. (2001). Nonlinear Mean Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles. International Economic Review, pp. 1015–1042, DOI: 10.1111/14682354.0014. Teräsvirta, T. (1994). Specification, estimation and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association, 89, 208–218. Teräsvirta, T. (2006). Forecasting Economic Variables with Nonlinear Models. In G. Elliott, C. Granger and A. Timmermann (eds.), Handbook of Economic Forecasting, vol. 1, Elsevier BV., pp. 414–457. Tsay, R. (1989). Testing and modeling threshold autoregressive processes. Journal of the American Statistical Association, 84, 231–240. Westerlund, J. (2007). Testing for Error Correction in Panel Data. Oxford Bulletin of Economics and Statistics, 69, 709–748, DOI: 10.1111/j.14680084.2007.00477.x. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/37418 
Available Versions of this Item

Does the purchasing power parity hypothesis hold after 1998? (deposited 06. Dec 2010 01:02)
 Updating the PPP puzzle: should we use nonlinear models? (deposited 19. Mar 2012 01:24) [Currently Displayed]