Searching for nonlinearities in real exchange rates
AbstractA recent innovation in modelling exchange rates has been the use of nonlinear techniques such as threshold autoregressive models and its smooth transition variants. This article investigates the Smooth Transition Autoregressive (STAR) modelling strategy in an application to real exchange rates. The key findings are as follows. First, using the methodology advocated by Terasvirta (1994), we find evidence of nonlinear dynamics for several of the spot dollar real exchange rates using monthly data on five of the G7 countries. However, once estimated, we find that the STAR specification is appropriate for only one of the three exchange rate series indicated to be an Exponential Smooth Transition Autoregressive (ESTAR) process. Moreover, using simulations, we show that the underlying methodology used to detect nonlinearities in the data exhibit substantial size biases, which we attribute to influential observations. We find, upon investigating alternative nonlinear specifications, that the open-loop Threshold Autoregressive (TAR) process is a more appropriate specification than the ESTAR process for the dollar-sterling and dollar-lira real exchange rates.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics.
Volume (Year): 43 (2011)
Issue (Month): 15 ()
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Other versions of this item:
- Yamin Ahmad & Stuart Glosser, 2007. "Searching for Nonlinearities in Real Exchange Rates?," Working Papers 09-01, UW-Whitewater, Department of Economics, revised Jan 2009.
- F30 - International Economics - - International Finance - - - General
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