Time-Varying Thresholds: An Application to Purchasing Power Parity

33 Pages Posted: 1 Feb 2006

See all articles by Hyginus Leon

Hyginus Leon

International Monetary Fund (IMF)

Serineh Najarian

University of Oxford - Department of Economics

Date Written: September 2003

Abstract

This paper introduces a time-varying threshold autoregressive model (TVTAR), which is used to examine the persistence of deviations from PPP. We find support for the stationary TVTAR against the unit root hypothesis; however, for some developing countries, we do not reject the TVTAR with a unit root in the corridor regime. We calculate magnitudes, frequencies, and durations of the deviations of exchange rates from forecasted changes in exchange rates. A key result is asymmetric adjustment. In developing countries, the average cumulative deviation from forecasts during periods when exchange rates are below forecasts is twice the corresponding measure during periods when exchange rates are above forecasts.

Keywords: Purchasing power parity, time-varying thresholds, asymmetry

JEL Classification: C22, F31

Suggested Citation

Leon, Hyginus and Najarian, Serineh, Time-Varying Thresholds: An Application to Purchasing Power Parity (September 2003). IMF Working Paper No. 03/181, Available at SSRN: https://ssrn.com/abstract=880259

Hyginus Leon (Contact Author)

International Monetary Fund (IMF) ( email )

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Serineh Najarian

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