Mean-reversion vs. adjustment to PPP: the two regimes of exchange rate dynamics under the EMS, 1979-1998
AbstractThis paper examines jointly the empirical relevance of the mean-reversion and the PPP hypotheses in the exchange rate dynamics under the EMS. Given the non-stationarity and the non-linearities characterizing the foreign exchange rate dynamics, this question is studied using a MS-ECM model: it allows a discontinuous adjustment towards the cointegration relationship. We find that the European exchange rates of the ERM members display mean-reversion towards the central parity in the credible regime, whereas they adjust to the PPP during the volatile period. The first mechanism is due to the stabilizing effect of a credible target-zone, while the second one can be explained by the realignments made in accordance with the underlying inflation rates.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 20 (2003)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/30411
Other versions of this item:
- Bessec, Marie, 2003. "Mean-reversion vs. adjustment to PPP: the two regimes of exchange rate dynamics under the EMS, 1979–1998," Economics Papers from University Paris Dauphine 123456789/12206, Paris Dauphine University.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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