Tests for Unit-Root Versus Threshold Specification with an Application to the Purchasing Power Parity Relationship

Journal of Business and Economic Statistics, Forthcoming

Posted: 8 Jun 2004

See all articles by Frederique Bec

Frederique Bec

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

Marine Carrasco

University of Montreal - Departement de Ciences Economiques

Abstract

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, C22

Suggested Citation

Bec, Frederique and Bec, Frederique and Ben Salem, Melika and Carrasco, Marine, Tests for Unit-Root Versus Threshold Specification with an Application to the Purchasing Power Parity Relationship. Journal of Business and Economic Statistics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=555725

Frederique Bec

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Melika Ben Salem

Université Paris-Est Marne la Vallée (UPEMLV) ( email )

France

Universite Paris Est ( email )

Batiment Bois de l'Etang
5 rue Galilee
Champs sur Marne, 77420
France

Marine Carrasco (Contact Author)

University of Montreal - Departement de Ciences Economiques ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada
(514) 343-2394 (Phone)

HOME PAGE: http://www.sceco.umontreal.ca/liste_personnel/carrasco/index.htm

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