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Large Data Sets, Nonlinearity and the Speed of Adjustment to Real Exchange Rate Shocks

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  • Hyeyoen Kim

    (economics dept - University of Leicester)

Abstract

A well known puzzle in international finance concerns the observed very slow speeds of adjustment of real exchange rates in response to shocks. In this paper, we explore whether allowing for a wide range of influences on the real exchange rate in a nonlinear framework can help resolve this puzzle. Using recently proposed econometric methods for summarising very large macroeconomic data sets into a small number of observable factors, we find that there is a long-run relationship between these factors and real exchange rates. When put into a nonlinear framework, we find that allowing for the effects of macroeconomic factors dramatically increases the measured speed of adjustment of the real exchange rate.

Suggested Citation

  • Hyeyoen Kim, 2011. "Large Data Sets, Nonlinearity and the Speed of Adjustment to Real Exchange Rate Shocks," Post-Print hal-00665456, HAL.
    • Handle: RePEc:hal:journl:hal-00665456
    DOI: 10.1080/00036846.2010.513676
    Note: View the original document on HAL open archive server: https://hal.science/hal-00665456
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