Nonlinear adjustment towards purchasing power parity: the Swiss Franc-German Mark case

Roger Guerra

Swiss Journal of Economics and Statistics (SJES), 2003, vol. 139, issue I, 83-100

Abstract: We test the hypothesis of nonlinear adjustment towards the purchasing power parity as suggested by Dumas' (1992) model. We estimate a stable exponential smooth transition regression model (ESTAR) for the Swiss franc/German mark exchange rate over the 1960-1998 period, where the adjustment to the steady state takes place rapidly. The results reveal that, for small deviations, the real exchange rate is best described by a random walk, whereas for larger deviations the real exchange rate is clearly mean-reverting. The same results are found when the sample is reduced to cover only the post Bretton-Woods period. A Monte Carlo simulation shows that our nonlinear models are clearly stable. When the real exchange rate is outside the no-arbitrage band, the estimated deviation half-lives are about 1.5 and 2.5 years for respectively the entire and the restricted sample.

Keywords: Purchasing power parity; nonlinearity; STAR models (search for similar items in EconPapers)
JEL-codes: E31 F31 (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ses:arsjes:2003-i-4

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