Purchasing Power Parity Revisit: A Comparison of Linear and Nonlinear Models
This paper aims to expand PPP literature by twofold. First, the performance of the conventional linear PPP model (OLS) is compared with nonlinear PPP (GARCH). Secondly, we revisit the PPP by using more recent data for the currencies of five leading members of the Association of Southeast Asia ati...
Saved in:
| Main Authors: | , |
|---|---|
| Format: | Article |
| Language: | English English |
| Published: |
Universiti Putra Malaysia Press
2006
|
| Online Access: | http://psasir.upm.edu.my/id/eprint/3611/1/Purchasing_Power_Parity_Revisit_A_Comparison.pdf http://psasir.upm.edu.my/id/eprint/3611/ |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| Summary: | This paper aims to expand PPP literature by twofold. First, the performance of
the conventional linear PPP model (OLS) is compared with nonlinear PPP
(GARCH). Secondly, we revisit the PPP by using more recent data for the
currencies of five leading members of the Association of Southeast Asia ations
(ASEAN-5), covering from January 1980 to ovember 2002, including the
recent Asian financial crisis. Our results suggest that generally, the ASEAN-5
currencies still revert to their PPP equilibrium over long run time horizon.
While all series show response to the crisis, the Philippine peso and Singapore
dollar obviously received the least impact. Although Malaysia and Thailand
have suffered huge undervaluation during the crisis, both Malaysian ringgit
and Thai baht are found to be corrected at a quicker pace relative to the other
three currencies from the misalignments. In addition, we also documented
several nonlinear behaviors of the ASEAN-5 currencies and found that the
nonlinear models outperform the linear model in modeling PPP, based on
their superiority in out-of-sample forecasting. |
|---|