Large data sets, nonlinearity and the speed of adjustment to real exchange rate shocks
AbstractA well known puzzle in international finance concerns the very slow speeds of adjustment of real exchange rates observed in response to shocks. In this article, we explore whether allowing for a wide range of influences on the real exchange rate in a nonlinear framework can help resolve this puzzle. Using, recently proposed econometric methods for summarizing very large macroeconomic data sets into a small number of observable factors, we find that there is a long run relationship between these factors and real exchange rates. When put into a nonlinear framework, we find that allowing for the effects of macroeconomic factors dramatically increases the measured speed of adjustment of the real exchange rate.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics.
Volume (Year): 44 (2012)
Issue (Month): 5 (February)
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