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Asymmetric adjustment and nonlinear dynamics in real exchange rates

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Author Info
Hyginus Leon (International Monetary Fund, Washington, DC, USA)
Serineh Najarian (Hertford College, Oxford, UK)
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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File URL: http://hdl.handle.net/10.1002/ijfe.257
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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:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kleopatra Nikolaou, 2006. "The behaviour of the real exchange rate: evidence from regression quantiles," Working Paper Series 667, European Central Bank. [Downloadable!]
  2. 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. [Downloadable!]
  3. 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. [Downloadable!]
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