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Testing for two-regime threshold cointegration in the parallel and official markets for foreign currency in Greece

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Author Info
Nektarios Aslanidis (Department of Economics, University of Crete, Greece)
George Kouretas () (Department of Economics, University of Crete, Greece)

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Abstract

This paper models the short-run as well as the long-run relationship between the parallel and official markets for US dollars in Greece in a threshold VECM framework. Modeling exchange rates within this context can be motivated by the fact that the transition mechanism is controlled by the parallel market premium. The results show that linearity is rejected in favour of a TVECM specification, which forms statistically an adequate representation of the data. Two regimes are implied by the model; the “typical” regime, which applies most of the time and the “unusual” one associated with economic and political events t hat took place in Greece during the 1980s. Another implication is that in the parallel exchange rate there are strong asymmetries between the two regimes in the speed of adjustment to the long-run equilibrium. Finally, Granger causality runs from the official to the parallel market in both regimes but not vice versa.

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Publisher Info
Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0311.

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Length: 30 pages
Date of creation: 00 Nov 2003
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Handle: RePEc:crt:wpaper:0311

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Related research
Keywords: Parallel market premium; nonlinearity; threshold cointegration; regime switching;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F31 - International Economics - - International Finance - - - Foreign Exchange

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