Time-Varying Thresholds: An Application to Purchasing Power Parity
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Summary:
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.
Series:
Working Paper No. 2003/181
Subject:
Exchange rate adjustments Exchange rates Public expenditure review Purchasing power parity Real exchange rates
English
Publication Date:
September 1, 2003
ISBN/ISSN:
9781451859218/1018-5941
Stock No:
WPIEA1812003
Pages:
33
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