Regime-switching purchasing power parity in Latin America: Monte Carlo unit root test with dynamic conditional score
Autores
Luis A. Gil-Alaña
Astrid Ayala
Szabolcs Blazsek
Juncal Cuñado
Tipo
Artículo
Editorial
Applied Economics, Vol. 48, Issue 29
Páginas
2675-2696
Fecha
06-06-2016
Resumen

We suggest a Monte Carlo simulation-based unit root test of the purchasing power parity theory for Latin American countries. Under the null hypothesis, we use a Markov regime-switching (MS) model with unit root in the conditional location and MS volatility dynamics. Under the alternative hypothesis, the proposed test incorporates Markov regime-switching autoregressive moving average (MS-ARMA) plus MS volatility dynamics. Under both the null and alternative hypotheses, one of the volatility models estimated is Beta-t-EGARCH, which is a recent dynamic conditional score volatility model. We use data on real effective exchange rate time series for 14 Latin American countries. For each country, we estimate by Monte Carlo simulation the critical values of the unit root test. We provide an economic discussion of the unit root test results and also study the robustness of MS-ARMA plus MS volatility with respect to smooth transition autoregressive models with Fourier function.

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