A Nonlinear View of Long-Run PPP Using Cross-Sectionally Dependent Heterogeneous Panels

• Published in: Jing ji lun wen cong kan Vol. 47; no. 1; pp. 1 - 40
• Main Authors: 陳奕奇(Yi-Chi Chen), 林常青(Chang-Ching Lin), 冼芻蕘(Chor-yiu Sin)
• Format: Journal Article
• Language: English
• Published: 台灣 臺灣大學經濟學系 01.03.2019; 國立臺灣大學經濟學系; Taiwan Economic Review
• Subjects: American dollar; Arbitrage; asymmetric adjustment; cross-sectional dependence; Currency; EconLit; Economics; Floating exchange rates; Foreign exchange rates; longrun PPP; Purchasing power parity; real exchange rate; Regression analysis; threshold autoregression (TAR); Time series; TSSCI; 不對稱調整; 實質匯率; 橫斷面相依性; 長期購買力平價; 門檻自我迴歸; Europe; real exchange rate; 門檻自我迴歸; 不對稱調整; cross-sectional dependence; 橫斷面相依性; long-run PPP; asymmetric adjustment; threshold autoregression (TAR); 長期購買力平價; 實質匯率
• ISSN: 1018-3833
• DOI: 10.6277/TER.201903_47(1).0001

Empirical studies have flourished on long-run PPP using panel unit root tests, which supposedly have high power. In this paper, we adopt, in a panel data context, a nonlinear multiple-regime model, namely Threshold Autoregression (TAR), and perform a panel unit root test for each regime in the TAR. This new procedure takes advantage of two existing approaches: the inference for a TAR model with a unit root, and the panel unit root tests with the augmented panel Dickey-Fuller regression. The real exchange rate dynamics in a panel of 17 OECD countries over the recent floating exchange rate period are investigated. Three distinct regimes are identified. In particular, the support for long-run PPP is much stronger in the post-Maastricht-Treaty period than the period before; in the pre- Maastricht-Treaty period, there is some evidence for long-run PPP when the sterling-dollar appreciated, while the evidence is weak when the sterling-dollar depreciated. Our results are robust to expanding the data set to 2012, using the euro foreign exchange reference rates.