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Asymmetric adjustment and nonlinear dynamics in real exchange rates

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  • Hyginus Leon

    (International Monetary Fund, Washington, DC, USA)

  • Serineh Najarian

    (Hertford College, Oxford, UK)

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    Abstract

    This paper examines whether deviations from PPP are stationary in the presence of nonlinearity, and whether the adjustment towards PPP is symmetric from above and below. Using alternative nonlinear models, our results support mean reversion and asymmetric adjustment dynamics. We find differences in magnitudes, frequencies and durations of the deviations of exchange rates from fixed and time-varying thresholds, both between over-appreciations and over-depreciations and between developed and developing countries. In particular, the average cumulative sum of deviations during periods when exchange rates are below forecasts is twice that during periods of over-appreciation and larger for developing than advanced countries. Copyright © 2005 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

    Volume (Year): 10 (2005)
    Issue (Month): 1 ()
    Pages: 15-39

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    Handle: RePEc:ijf:ijfiec:v:10:y:2005:i:1:p:15-39

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    Cited by:
    1. Nikolaou, Kleopatra, 2006. "The behaviour of the real exchange rate: evidence from regression quantiles," Working Paper Series 0667, European Central Bank.
    2. Simpson, Marc W. & Grossmann, Axel, 2014. "An examination of the forward prediction error of U.S. dollar exchange rates and how they are related to bid-ask spreads, purchasing power parity disequilibria, and forward premium asymmetry," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 221-238.
    3. Norman, Stephen & Phillips, Kerk L., 2009. "What is the Shape of Real Exchange Rate Nonlinearity?," MPRA Paper 23504, University Library of Munich, Germany.
    4. Emekter, Riza & Jirasakuldech, Benjamas & Snaith, Sean M., 2009. "Nonlinear dynamics in foreign exchange excess returns: Tests of asymmetry," Journal of Multinational Financial Management, Elsevier, vol. 19(3), pages 179-192, July.
    5. Victor Pontines & Reza Y. Siregar, 2010. "Fear of Appreciation in East and Southeast Asia: The Role of the Chinese Renminbi," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp78, June.
    6. Victor Pontines & Reza Y. Siregar, 2010. "Exchange Rate Asymmetry and Flexible Exchange Rates under Inflation Targeting Regimes: Evidence from Four East and Southeast Asian Countries," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp77, June.
    7. Bahmani-Oskooee, Mohsen & Hegerty, Scott W. & Kutan, Ali M., 2009. "Is PPP sensitive to time-varying trade weights in constructing real effective exchange rates?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1001-1008, August.
    8. Paraschiv, Florentina, 2012. "Adjustment Policy of Deposit Rates in the Case of Swiss non-Maturing Savings Accounts," Working Papers on Finance 1219, University of St. Gallen, School of Finance.
    9. Mauro S. Ferreira, 2007. "Capturing asymmetry in real exchange rate with quantile autoregression," Textos para Discussão Cedeplar-UFMG td306, Cedeplar, Universidade Federal de Minas Gerais.
    10. Peltonen, Tuomas A. & Popescu, Adina & Sager, Michael, 2009. "Can non-linear real shocks explain the persistence of PPP exchange rate disequilibria?," Working Paper Series 1073, European Central Bank.
    11. McMillan, David G., 2009. "The confusing time-series behaviour of real exchange rates: Are asymmetries important?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 692-711, October.
    12. Samira Haddou, 2011. "Is Tunisian Real Effective Exchange Rate Mean Reverting? Evidence from Nonlinear Models," Transition Studies Review, Springer, vol. 18(1), pages 164-178, September.
    13. Baharumshah, Ahmad Zubaidi & Liew, Venus Khim-Sen & Chowdhury, Ibrahim, 2010. "Asymmetry dynamics in real exchange rates: New results on East Asian currencies," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 648-661, October.
    14. Kleopatra Nikolaou, 2007. "The behaviour of the real exchange rate: Evidence from regression quantiles," Money Macro and Finance (MMF) Research Group Conference 2006 46, Money Macro and Finance Research Group.

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