Are Real Exchange Rates Nonlinear with a Unit Root? Evidence on Purchasing Power Parity for China: A Note

Abstract

This article applies the threshold autoregressive model proposed by Caner and Hansen (2001) to examine both linearity and stationarity of China's real exchange rate vis-à-vis her 9 trading partner countries over the period of January 1986 to October 2009. Two main conclusions are drawn. Firstly, the empirical results indicate that China's real exchange is a nonlinear process. Secondly, a unit root in real exchange rate was found for most of the cases under study. This result provides no support for purchasing power parity for China relative to their major trading partner countries.Threshold Autoregressive Model; Linearity and Stationarity, Purchasing Power Parity; Threshold Unit Root Test