Time-Varying Thresholds: An Application to Purchasing Power Parity

Gene Leon and Serineh Najarian

No 2003/181, IMF Working Papers from International Monetary Fund

Abstract: This paper introduces a time-varying threshold autoregressive model (TVTAR), which is used to examine the persistence of deviations from PPP. We find support for the stationary TVTAR against the unit root hypothesis; however, for some developing countries, we do not reject the TVTAR with a unit root in the corridor regime. We calculate magnitudes, frequencies, and durations of the deviations of exchange rates from forecasted changes in exchange rates. A key result is asymmetric adjustment. In developing countries, the average cumulative deviation from forecasts during periods when exchange rates are below forecasts is twice the corresponding measure during periods when exchange rates are above forecasts.

Keywords: WP; exchange rate (search for similar items in EconPapers)
Pages: 33
Date: 2003-09-01
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Citations: View citations in EconPapers (7)

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