Time-Varying Thresholds: An Application to Purchasing Power Parity

Nonlinear Exchange Rate Models: A Selective Overview

“…Some empirical evidence of the effect of transactions costs on tests of PPP is provided by Davutyan and Pippenger (1990). More recently, Obstfeld and Taylor (1997), Taylor (2001), Sarno, Taylor, and Chowdhury (2003), Leon and Najarian (2003) have investigated the nonlinear nature of the adjustment process in terms of a threshold autoregressive (TAR) model (Tong, 1990). The TAR model allows for a transactions costs band within which no adjustment takes place-so that deviations from PPP may exhibit unit root behavior-while outside of the band the process switches abruptly to become stationary autoregressive.…”

Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates

“…Asymmetry also holds on a cross-sectional basis. Using the results from identical TAR models for an expanded set of 35 countries, for which both debt and openness data were available, Leon and Najarian (2003) found a positive correlation between average openness" and average duration for over-appreciations but no correlation between openness and average duration for overdepreciations; similarly, they found a positive correlation between the average debt to GOP ratio and the average excess deviation (as defined in this paper) for over-depreciations but no -29correlation between the debt ratio and the excess deviation for over-appreciations. The implication that openness may be related to duration of over-appreciation misalignments but debt ratios are related to excess deviations of over-depreciations merits further research.…”