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Nonlinear Exchange Rate Models: A Selective Overview

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  • Lucio Sarno

    ()
    (University of Warwick, IMF and CEPR, London)

Abstract

This paper provides a selective overview of nonlinear exchange rate models recently proposed in the literature and assesses their contribution to understanding exchange rate behavior. Two key questions are examined. The first question is whether nonlinear autoregressive models of real exchange rates help resolve the “purchasing power parity (PPP) puzzles”. The second question is whether recently developed nonlinear, regime-switching vector equilibrium correction models of the nominal exchange rate can beat a random walk model, the standard benchmark in the exchange rate literature, in terms of out-of-sample forecasting performance. Finally, issues related to the adequateness of standard methods of evaluation of (linear and nonlinear) exchange rate models are discussed with reference to different forecast accuracy criteria.

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File URL: http://www.rivistapoliticaeconomica.it/2003/lu_ago/sarno.zip
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Bibliographic Info

Article provided by SIPI Spa in its journal Rivista di Politica Economica.

Volume (Year): 93 (2003)
Issue (Month): 4 (July-August)
Pages: 3-46

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Handle: RePEc:rpo:ripoec:v:93:y:2003:i:4:p:3-46

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Cited by:
  1. Ibrahim Chowdhury, 2004. "Purchasing Power Parity and the Real Exchange Rate in Bangladesh: A Nonlinear Analysis," Working Paper Series in Economics 14, University of Cologne, Department of Economics.
  2. Ales Bulir, 2004. "Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries," IMF Working Papers 04/35, International Monetary Fund.
  3. Ales Bulir, 2003. "Some Exchange Rates Are More Stable than Others: Short-Run Evidence from Transition Countries," Working Papers 2003/05, Czech National Bank, Research Department.
  4. John W. Galbraith & Greg Tkacz, 2007. "How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables," Working Papers 07-1, Bank of Canada.
  5. Miller, J. Isaac, 2011. "Testing the bounds: Empirical behavior of target zone fundamentals," Economic Modelling, Elsevier, vol. 28(4), pages 1782-1792, July.
  6. Ming Chien Lo & James Morley, 2013. "Bayesian Analysis of Nonlinear Exchange Rate Dynamics and the Purchasing Power Parity Persistence Puzzle," Discussion Papers 2013-05, School of Economics, The University of New South Wales.
  7. Pau Rabanal & Juan F. Rubio-Ramirez, 2012. "Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates?," IMF Working Papers 12/13, International Monetary Fund.
  8. Erik Alencar de Figueiredo & André de Mattos Marques, 2013. "Testing absolute PPP hypothesis for twenty countries through the skeleton from a SETAR model- some new evidence," Série Textos para Discussão (Working Papers) 16, Programa de Pós-Graduação em Economia - PPGE, Universidade Federal da Paraíba.
  9. Junttila, Juha & Korhonen, Marko, 2011. "Nonlinearity and time-variation in the monetary model of exchange rates," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 288-302, June.

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