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

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