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

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  • Robert Sollis

    (Department of Economics and Finance, University of Durham, UK)

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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  • Robert Sollis, 2005. "Evidence on purchasing power parity from univariate models: the case of smooth transition trend-stationarity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 79-98.
    • Handle: RePEc:jae:japmet:v:20:y:2005:i:1:p:79-98
    DOI: 10.1002/jae.772
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    Cited by:

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    2. McMillan, David G., 2009. "The confusing time-series behaviour of real exchange rates: Are asymmetries important?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 692-711, October.
    3. Pavlidis, Efthymios G. & Paya, Ivan & Peel, David A., 2015. "Testing for linear and nonlinear Granger causality in the real exchange rate–consumption relation," Economics Letters, Elsevier, vol. 132(C), pages 13-17.
    4. repec:ebl:ecbull:v:3:y:2008:i:27:p:1-8 is not listed on IDEAS
    5. Emmanuel Numapau Gyamfi & Adam Anokye Mohammed, 2017. "Validity of Purchasing Power Parity in BRICS under a DFA Approach," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 13(1), pages 17-28, February.
    6. Robert Kelm, 2017. "The Purchasing Power Parity Puzzle and Imperfect Knowledge: The Case of the Polish Zloty," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 9(1), pages 1-27, March.
    7. Juan Carlos Cuestas & Estefania Mourelle, 2011. "Nonlinearities in real exchange rate determination: do African exchange rates follow a random walk?," Applied Economics, Taylor & Francis Journals, vol. 43(2), pages 243-258.
    8. P. S. Sephton, 2010. "Unit roots and purchasing power parity: another kick at the can," Applied Economics, Taylor & Francis Journals, vol. 42(27), pages 3439-3453.
    9. Juan Carlos Cuestas & Paulo José Regis, 2008. "Testing for PPP in Australia: Evidence from unit root test against nonlinear trend stationarity alternatives," Economics Bulletin, AccessEcon, vol. 3(27), pages 1-8.
    10. Paraskevi Salamaliki & Ioannis Venetis, 2014. "Smooth transition trends and labor force participation rates in the United States," Empirical Economics, Springer, vol. 46(2), pages 629-652, March.
    11. Cai, Yifei & Menegaki, Angeliki N., 2019. "Fourier quantile unit root test for the integrational properties of clean energy consumption in emerging economies," Energy Economics, Elsevier, vol. 78(C), pages 324-334.
    12. Sandberg, Rickard, 2016. "Trends, unit roots, structural changes, and time-varying asymmetries in U.S. macroeconomic data: the Stock and Watson data re-examined," Economic Modelling, Elsevier, vol. 52(PB), pages 699-713.
    13. Mario Cerrato & Hyunsok Kim & Ronald MacDonald, 2008. "3-Regime symmetric STAR modeling and exchange rate reversion," Working Papers 2009_05, Business School - Economics, University of Glasgow, revised Feb 2009.
    14. Banu Kurtaran, 2015. "Re-examining the PPP Hypothesis via Nonlinearity and Smooth Breaks," Econometrics Letters, Bilimsel Mektuplar Organizasyonu (Scientific letters), vol. 2(1), pages 1-21.
    15. Zixiong Xie & Shyh-Wei Chen & An-Chi Wu, 2023. "Real interest rate parity in the Pacific Rim countries: new empirical evidence," Empirical Economics, Springer, vol. 64(3), pages 1471-1515, March.
    16. Dimitris Christopoulos & Peter McAdam & Elias Tzavalis, 2023. "Exploring Okun's law asymmetry: An endogenous threshold logistic smooth transition regression approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 123-158, February.
    17. Mariam Camarero & Juan Carlos Cuestas & Javier Ordonez, 2008. "Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 30-46.
    18. Tolga Omay & Furkan Emirmahmutoglu & Mubariz Hasanov, 2018. "Structural break, nonlinearity and asymmetry: a re-examination of PPP proposition," Applied Economics, Taylor & Francis Journals, vol. 50(12), pages 1289-1308, March.
    19. Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2013. "Equilibrium exchange rate determination and multiple structural changes," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 52-66.
    20. Rickard Sandberg, 2018. "Unit Root Testing in Multiple Smooth Break Models with Nonlinear Dynamics," Journal of Time Series Analysis, Wiley Blackwell, vol. 39(6), pages 942-952, November.
    21. Grossmann, Axel & McMillan, David G., 2010. "Forecasting exchange rates: Non-linear adjustment and time-varying equilibrium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 436-450, October.
    22. Sollis, Robert, 2008. "U.S. dollar real exchange rates: Nonlinearity revisited," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 516-528, June.
    23. Nicolau João, 2011. "Purchasing Power Parity Analyzed from a Continuous-Time Model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(3), pages 1-26, May.
    24. Xie, Zixiong & Chen, Shyh-Wei & Hsieh, Chun-Kuei, 2021. "Facing up to the polysemy of purchasing power parity: New international evidence," Economic Modelling, Elsevier, vol. 98(C), pages 247-265.
    25. Wu, Jyh-Lin & Hu, Yu-Hau, 2009. "New evidence on nominal exchange rate predictability," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 1045-1063, October.

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