Nonlinear PPP Deviations: A Monte Carlo Investigation of Their Unconditional Half-Life

Lo Ming Chien ()
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Lo Ming Chien: St. Cloud State University

Studies in Nonlinear Dynamics & Econometrics, 2008, vol. 12, issue 4, 31

Abstract: Recent research has generated support of the notion that the real exchange rate adjustment is nonlinear and that the PPP half-life is faster than the puzzling 3 to 5 years based on linear models. While different nonlinear models survive the specification tests against linear ones, there is little consensus on which specific threshold-type model outperforms the others in the family. In this paper, a Monte Carlo study is designed to address the issue and the findings support that the MR-LSTAR process is the most likely suspect that generates the puzzle.

Date: 2008
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DOI: 10.2202/1558-3708.1482

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