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Real exchange rates and real interest rates : a nonlinear perspective

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Author Info

  • Frédérique BEC

    (CREST-ENSAE)

  • Mélika BEN SALEM

    (OEP, Université Marne-la-Vallée)

  • Ronald MACDONALD

    (University of Glasgow)

Abstract

In this paper we use a Threshold AutoRegressive (TAR) model to capture the nonlinear dynamics of monthly real effective exchange rate data for the G7 countries. The novelty of our approach relates to the use of the real interest differential as the switching variable. This choice allows us to consider jointly the nonlinearity and nonstationarity issues using récent advances in asymptotic theory. We find that the null of linearity is easily rejected against the nonlinear model for ail currencies considered. Further, for five out of the seven countries, where the null of unit root is rejected, we report evidence of quite rapid mean reversion.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2006024.

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Length: 18
Date of creation: 01 Jun 2006
Date of revision:
Handle: RePEc:ctl:louvre:2006024

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Keywords: Real exchange rate; threshold autoregressive model; unit-root;

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References

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  1. Edison, Hali J & Melick, William R, 1999. "Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 4(2), pages 93-111, April.
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  3. Edison, Hali J. & Pauls, B. Dianne, 1993. "A re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(2), pages 165-187, April.
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  6. Kilian, Lutz & Taylor, Mark P, 2001. "Why is it so Difficult to Beat the Random Walk Forecast of Exchange Rates?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3024, C.E.P.R. Discussion Papers.
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  17. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1309-19, September.
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Citations

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Cited by:
  1. Million, N., 2008. "Test simultané de la non-stationnarité et de la non-linéarité : une application au taux d.intérêt réel américain," Working papers, Banque de France 201, Banque de France.
  2. Gilles DUFRENOT & Laurent MATHIEU & Val=E9rie MIGNON & Anne PEGUIN-FEISSOLE, 2003. "Persistent misalignments of the European exchanges rates: some evidence from nonlinear cointegration," International Finance, EconWPA 0309003, EconWPA.
  3. repec:ebl:ecbull:v:6:y:2003:i:1:p:1-13 is not listed on IDEAS
  4. Sekioua, Sofiane H., 2006. "Nonlinear adjustment in the forward premium: evidence from a threshold unit root test," International Review of Economics & Finance, Elsevier, Elsevier, vol. 15(2), pages 164-183.
  5. Benbouziane, Mohamed & Benamar, Abdelhak, 2006. "The Purchasing Power Parity in The Maghreb Countries : A Nonlinear Perspective," MPRA Paper 13853, University Library of Munich, Germany, revised 2007.
  6. repec:hal:journl:halshs-00119051 is not listed on IDEAS
  7. Sofiane Sekioua, 2004. "The forward unbiasedness hypothesis and the forward premium: a nonlinear analysis," Money Macro and Finance (MMF) Research Group Conference 2003, Money Macro and Finance Research Group 85, Money Macro and Finance Research Group.
  8. Penelope Smith, 2006. "Bayesian Inference for a Threshold Autoregression with a Unit Root," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2006n20, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  9. Nicolas Million, 2006. "Changements de régime pour la persistance et la dynamique du taux d'intérêt réel américain," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) v06067, Université Panthéon-Sorbonne (Paris 1).
  10. Sofiane Hicham Sekioua, 2003. "The Nominal Exchange Rate and Monetary Fundamentals: Evidence from Nonlinear Unit Root Tests," Economics Bulletin, AccessEcon, vol. 6(1), pages 1-13.
  11. Sekioua, Sofiane H., 2008. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the largest root and the half-life," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(1), pages 76-101, February.

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