Half Life of the Real Exchange Rate: Evidence from the Nonlinear Approach in Emerging Economies

Abstract

For resolving the “purchasing power parity puzzle”, Rogoff (1996) proposed that the_x000D_ convergence of real exchange rates to PPP should be shorter than that found in_x000D_ previous studies. Many previous studies have tried to resolve the purchasing power_x000D_ parity puzzle through the nonlinear modeling of real exchange rates. However, most_x000D_ previous research on the half lives of real exchange rates has focused on developed_x000D_ countries. It should be noted, however, that emerging market countries should have_x000D_ more serious market frictions than developed countries. To compare the modeling of_x000D_ real exchange rates in these emerging countries with those in developed countries,_x000D_ we can use nonlinear models to more appropriately characterize the behavior of the_x000D_ real exchange rates in emerging economies. We use the band threshold_x000D_ autoregressive model (band TAR model) to conduct our analysis. The empirical_x000D_ results from six major emerging countries show that the real exchange rates are all_x000D_ stationary and can all be fitted by the band TAR model. The half-life estimates of_x000D_ major emerging countries are indeed rather short. This finding indicates that,_x000D_ through the progress of globalization, major emerging economies have a good_x000D_ ability to enable the movements in exchange rates to accord with purchasing power_x000D_ parity.