Updating the PPP puzzle: should we use nonlinear models?

Zanetti Chini, Emilio (2010): Updating the PPP puzzle: should we use nonlinear models?

Abstract

We investigate the empirical support to the Purchasing Power Parity hypothesis in sixteen real exchange rates for the decade 1999-2009 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 General-to-Specific 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
• 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 - Time-Series 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 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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