Temporal aggregation of an ESTAR process : some implications for purchasing power parity adjustment

Paya, I and Peel, D (2006) Temporal aggregation of an ESTAR process : some implications for purchasing power parity adjustment. Journal of Applied Econometrics, 21 (5). pp. 655-668. ISSN 0883-7252

Abstract

Nonlinear models of deviations from PPP have recently provided an important, theoretically well motivated, contribution to the PPP puzzle. Most of these studies use temporally aggregated data to empirically estimate the nonlinear models. As noted by Taylor (2001), if the true DGP is nonlinear, the temporally aggregated data could exhibit misleading properties regarding the adjustment speeds. We examine the effects of different levels of temporal aggregation on estimates of ESTAR models of real exchange rates.