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3-Regime symmetric STAR modeling and exchange rate reversion

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  • Mario Cerrato
  • Hyunsok Kim
  • Ronald MacDonald

Abstract

The breakdown of the Bretton Woods system and the adoption of generalised floating exchange rates ushered in a new era of exchange rate volatility and uncer­tainty. This increased volatility lead economists to search for economic models able to describe observed exchange rate behavior. In the present paper we propose more general STAR transition functions which encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another, and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data-sets, one for developing countries, and official nominal exchange rates, and the second for emerging market economies using black market exchange rates and the third for OECD economies.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2009_05.

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Date of creation: Dec 2008
Date of revision: Feb 2009
Handle: RePEc:gla:glaewp:2009_05

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Keywords: unit root tests; threshold autoregressive models; purchasing power parity.;

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