Forecasting EUR/PLN Exchange Rate: the Role of Purchasing Power Parity Hypothesis in ESTVEC Models

Abstract

The purpose of this paper is to verify empirical consequences of imposing various forms of purchasing power parity (PPP) within a class of smooth transition vector error correction models (ESTVECM) for analysis of EUR/PLN exchange rage. Empirical importance of exponential smooth transition functions is confronted with the linear error-correction mechanism. A class of competing models for recursive samples are compared by the like-lihood ratio test, information criteria, and out of sample forecast accuracy measures.