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

Robert Sollis

40 citations0/0 files storedJournal of Applied Econometrics

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Abstract

Abstract 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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References

1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 2001Nonlinear Mean‐Reversion in Real Exchange Rates: Toward a Solution To the Purchasing Power Parity Puzzles 1992Characterizing nonlinearities in business cycles using smooth transition autoregressive models 1997Transactions Costs and Nonlinear Adjustment in Real Exchange Rates; An Empirical Investigation 1997Searching for stationarity: Purchasing power parity under the current float 1998Unit roots and smooth transitions 1996Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test

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2008The Commodity Terms of Trade, Unit Roots, and Nonlinear Alternatives: A Smooth Transition Approach 2008Testing for PPP in Australia: evidence from unit root tests against nonlinear trend stationarity alternatives 2020Testing PPP hypothesis under temporary structural breaks and asymmetric dynamic adjustments 2008U.S. dollar real exchange rates: Nonlinearity revisited 2009

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