Time-Varying Thresholds: An Application to Purchasing Power Parity
33 Pages Posted: 1 Feb 2006
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: Suggested Citation
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