What do we know about real exchange rate non-linearities?
AbstractThis research points to the serious problem of potentially misspecified alternative hypotheses when testing for unit roots in real exchange rates. We apply a popular unit root test against nonlinear ESTAR and develop a Markov Switching unit root test. The empirical power of these tests against correctly and misspecified non-linear alternatives is analyzed by means of a Monte Carlo study. The chosen parametrization is obtained by real-life exchange rates. The test against ESTAR has low power against all alternatives whereas the proposed unit root test against a Markov Switching autoregressive model performs clearly better. An empirical application of these tests suggests that real exchange rates may indeed be explained by Markov-Switching dynamics.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-50.
Date of creation: 28 May 2009
Date of revision:
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Web page: http://www.econ.au.dk/afn/
real exchange rates; unit root test; ESTAR; Markov Switching; PPP;
Other versions of this item:
- Robinson Kruse & Michael Frömmel & Lukas Menkhoff & Philipp Sibbertsen, 2012. "What do we know about real exchange rate nonlinearities?," Empirical Economics, Springer, vol. 43(2), pages 457-474, October.
- R. Kruse & M. Frömmel & L. Menkhoff & P. Sibbertsen, 2010. "What do we know about real exchange rate nonlinearities?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/667, Ghent University, Faculty of Economics and Business Administration.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-07 (All new papers)
- NEP-CBA-2009-11-07 (Central Banking)
- NEP-ECM-2009-11-07 (Econometrics)
- NEP-ETS-2009-11-07 (Econometric Time Series)
- NEP-IFN-2009-11-07 (International Finance)
- NEP-OPM-2009-11-07 (Open Economy Macroeconomic)
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