Stochastic behaviour of the real exchange rate for Jordan: a re-examination

Abstract

The purpose of this article is to re-examine the validity of the long-run purchasing power parity (PPP) hypothesis for Jordan. Using a Markov-switching model, we provide some evidence that the real exchange rate of Jordan is stationary during periods of low real exchange rate volatility and nonstationary during periods of high real exchange rate volatility.

Notes

¹ For surveys of the subject, see Taylor and Taylor (2004), Sarno and Taylor (2002) and Taylor (2003, 2006).

² The MS-ADF model is used by Kanas and Genius (2005) to examine the stochastic behaviour of the US/UK real exchange rate.

³ As recently documented by Caporale et al. (2003) and Kanas and Genius (2005), there is endemic instability in the unit root tests usually employed in examining the validity of long-run PPP.

⁴ See, for example, Albert and Chib (1993), Casella and George (1992), Gelfald and Smith (1990) and Engle and Kim (1999) for detailed explanations of Gibbs Sampling method.