TEMPORAL AGGREGATION OF AN ESTAR PROCESS: SOME IMPLICATIONS FOR PURCHASING POWER PARITY ADJUSTMENT

Ivan Paya () and David A. Peel

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: Nonlinear models of deviations from PPP have recently provided an important, theoretically well motivated, contribution to the PPP puzzle. Most of these studies use temporally aggregated data to empirically estimate the nonlinear models. As noted by Taylor (2001), if the true DGP is nonlinear, the temporally aggregated data could exhibit misleading properties regarding the adjustment speeds. We examine the effects of different levels of temporal aggregation on\ estimates of ESTAR models of real exchange rates. Our Monte Carlo results show that temporal aggregation does not imply the disappearance of nonlinearity and that adjustment speeds are significantly slower in temporally aggregated data than in the true DGP. Furthermore, the autoregressive structure of some monthly ESTAR estimates found in the literature is suggestive that adjustment speeds are even faster than implied by the monthly estimates.

Keywords: ESTAR; Real Exchange Rate; Purchasing Power Parity; Aggregation. (search for similar items in EconPapers)
JEL-codes: F31 C22 C51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-fmk and nep-ifn
Date: 2004-06
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Published by Ivie

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http://www.ivie.es/downloads/docs/wpasad/wpasad-2004-25.pdf Fisrt version / Primera version, 2004 (application/pdf)

Related works:
Working Paper: Temporal aggregation of an ESTAR process: some implications for purchasing power parity adjustment (2005)
Journal Article: Temporal aggregation of an ESTAR process: some implications for purchasing power parity adjustment (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:ivi:wpasad:2004-25

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