Time-Varying Thresholds : An Application to Purchasing Power Parity

Author/Editor:

Gene L. Leon ; Serineh Najarian

Publication Date:

September 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 03/181

Subject:

English

Publication Date:

September 1, 2003

ISBN/ISSN:

9781451859218/1018-5941

Stock No:

WPIEA1812003

Format:

Paper

Pages:

33

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