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Investigating nonlinearities in real exchange rate adjustment: Threshold cointegration and the dynamics of exchange rates and relative prices

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  • Nakagawa, Hironobu
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    Abstract

    Motivated by growing evidence of nonlinear mean-reverting behavior in real exchange rates, this paper investigates the underlying dynamics in the context of a threshold vector error correction model (TVECM) of nominal exchange rate and relative prices. Unlike univariate models, our nonlinear multivariate framework takes into explicit account the joint behavior and individual dynamics of the nominal exchange rate and relative prices when these two key variables are threshold cointegrated. Our empirical application unravels their relative contribution to mean reversion and underscores the importance of capturing their interactions in investigating the nonlinear adjustment toward purchasing power parity.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 29 (2010)
    Issue (Month): 5 (September)
    Pages: 770-790

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    Handle: RePEc:eee:jimfin:v:29:y:2010:i:5:p:770-790

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Real exchange rate Nominal exchange rate Purchasing power parity Mean reversion Threshold vector error correction model Threshold cointegration;

    References

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    Cited by:
    1. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.

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