Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship
National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); University of Cergy-Pontoise - THEMA
Melika Ben Salem
Université Paris-Est Marne la Vallée (UPEMLV); Universite Paris Est
University of Montreal - Departement de Ciences Economiques
Journal of Business and Economic Statistics, Forthcoming
We consider modeling the real exchange rate by a stationary three-regime self-exciting threshold autoregressive (SETAR) model with possibly a unit root in the middle regime. This representation is consistent with purchasing power parity in the presence of trading costs. Our main contribution is to provide statistical tools for testing unit root versus a SETAR. First, we show that a SETAR with a unit root in the middle regime is stationary and mixing under reasonable assumptions. Second, we derive analytically the asymptotic distribution of our unit-root test under the null. Using monthly real exchange rate data, our test rejects the null of unit-root against a threshold process for five European series.
Keywords: Mixing conditions, real exchange rate, Threshold autoregressive model
JEL Classification: C12, C22Accepted Paper Series
Date posted: June 8, 2004
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