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Modelling the FF/MM rate by threshold cointegration analysis

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Author Info
Mustapha Baghli
Abstract

This paper investigates a sticky-price model of exchange rate determination: extension of Krugman's target zone model with price inertia applied to the French Franc. A novel theoretical argument is considered, Threshold Cointegration, such that the long-run relationship between the parity and its fundamentals is dormant within a certain range of disequilibria but is restored when the system crosses the boundaries. Over the period 1987-1993, nonlinearities in the FF/DM rate, consistent with the credibility of this target zone, were detected by pointing out a band-reversion mechanism. A shock persistence analysis which highlights a nonlinear reversion of the exchange-rate deviation is also implemented.

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Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 6 (April)
Pages: 533-548
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Handle: RePEc:taf:applec:v:36:y:2004:i:6:p:533-548

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    Other versions:
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  19. Potter, Simon M, 1995. "A Nonlinear Approach to US GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 109-25, April-Jun. [Downloadable!] (restricted)
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