Nonlinear Modelling of Purchasing Power Parity in Indonesia
Param Silvapulle (),
Titi Kanti Lestari and
Jae Kim ()
No 316, Econometric Society 2004 Australasian Meetings from Econometric Society
This paper models the dynamics of the adjustment process of Indonesian purchasing power parity (PPP) relative to US, Japan and Singapore by employing a nonlinear framework, which is recently shown to be appropriate in the presence of transaction costs associated with international trade. Using monthly observations from January 1979 to June 2003 (post-Bretton Woods period), covering the managed- and free-floating regimes in Indonesia, the real exchange rates were tested for their mean-reverting properties. A large number of studies found the real exchange series to be mean-averting and persistent, creating PPP puzzles. Using the linear framework many attempted to resolve these puzzles unsuccesfully. Motivated by the success of recent studies on PPP, applying a non-linear ESTAR to model the adjustment process, we tested for mean-reverting properties of all three real exchange rates for small and large deviations from the long-run equilibrium. We find that the small deviations are non-stationary, persistent and they can be explosive, while the large deviations are stationary with the adjustment process being very fast, making the overall adjustment process mean-reverting
Keywords: Purchasing Power Parity; ESTAR model; Mean-reversion (search for similar items in EconPapers)
JEL-codes: C22 F31 F32 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:ausm04:316
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