Table 4 - uploaded by Hyeongwoo Kim
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... the remaining 12 real exchange rates, we implement the impulse- response analysis to estimate the half-lives of PPP deviations. As can be seen in Table 4, allowing higher order AR() processes results in very different half-life estimates from those of the AR(1) specification for some countries such as Italy, Portugal, and Spain. This implies that one has to be careful in interpreting the results based on AR(1) models for these exchange rates. ...
Context 2
... Table 4 Here 30 The exceptions to this similarity are Japan and the UK, as our point estimates for these countries are much smaller than others. Using the same sample period of Murray and Papell (2002), however, we obtained the estimates of 0.89 and 0.82 for Japan and the UK, respectively, indicating that these exceptions seem to have arisen from the difference in the sample periods. ...
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... However, despite some improvements in data quality and methods, continuing research on this topic has still not reached a definite consensus. For instance, recent studies find no or little support for PPP (Arize et al., 2015;Huang and Yang, 2015;Su and Roca, 2014), while others find evidence to support it (Bergin et al., 2013;Cuestas and Regis, 2013;Kim et al., 2015;Li et al., 2015). ...
This paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflation-targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeting ones (the USA, the Euro Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarized as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities, thereby reducing deviations of the exchange rate from the PPP- and UIP-implied equilibrium.
We first show that the solution to the real exchange rate under the Taylor rule with interest rate smoothing can have two alternative representations—one based on a first‐order difference equation and the other based on a second‐order difference equation. Then, by comparing error terms from these two alternative representations and analyzing their second moments, we evaluate the relative importance of Taylor‐rule fundamentals, monetary policy shocks, and risk‐premium shocks in the dynamics of the real exchange rate. Empirical results suggest that the risk‐premium shock is the largest contributor to real exchange rate movements for all the countries examined, with the Taylor‐rule fundamentals and monetary policy shocks playing a limited role. These results are robust to various alternative sets of parameter values considered for the Taylor rule with interest rate smoothing.
We develop methods for testing the hypothesis that an econometric model is undeerindentified and inferring the nature of the failed identification. By adopting a generalized-method-of moments perspective, we feature directly the structural relations and we allow for nonlinearity in the econometric specification. We establish the link between a test for overidentifacion and our proposed test for underidentification. If, after attempting to replicate the structural relation, we find substantial evidence against the overidentifying restrictions of an augmented model, this is evidence against underidentification of the original model.
