Testing the Purchasing Power Parity Theory: A Case of the Taiwanese Dollar Exchange Rate

Abstract

From July 1978 to April 1989 Taiwan adopted a snake system by allowing the foreign exchange rate to fluctuate within a narrow band of the centere d rate. Using monthly data on the Taiwan dollar/U.S. dollar exchange rate, we show that inference on the purchasing power parity hypothesis is sensitive to whether we incorporate double truncation and autore g r essive and moving average error terms into the regression model. (JEL Classification: C2, F4)