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Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates

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  • H. L. Leon
  • Serineh Najarian
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    Abstract

    This paper examines whether deviations from PPP are stationary in the presence of nonlinearity, and whether the adjustment toward PPP is symmetric from above and below. Using alternative nonlinear models, our results support mean reversion and asymmetric adjustment dynamics. We find differences in magnitudes, frequencies, and durations of the deviations of exchange rates from fixed and time-varying thresholds, both between over-appreciations and over-depreciations and between developed and developing countries. In particular, the average cumulative sum of deviations during periods when exchange rates are below forecasts is twice that of the sum during periods of over-appreciation, and is larger for developing than for advanced countries.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/159.

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    Length: 48
    Date of creation: 01 Jul 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/159

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    Related research

    Keywords: Real effective exchange rates; Purchasing power parity; Economic models; exchange rate; exchange rates; nonlinearity; statistics; real exchange rate; real exchange rates; probabilities; nonlinear models; probability; bootstrap; time series; equation; cointegration; statistic; linear model; econometrics; correlation; linear models; effective exchange rates; time series analysis; nonlinear model; markov chain; sampling; skewness; stochastic process; covariance; foreign exchange; asymptotic distribution; real exchange rate misalignments; standard error; random coefficient; kurtosis; survey; exchange rate dynamics; real exchange rate dynamics; hypothesis testing; effective exchange rate; descriptive statistics; sampling distribution; exchange rate variations; nominal exchange rate; real effective exchange rate; nominal exchange rates; exchange rate misalignments; linear time; exchange rate change; standard deviations; exchange rate behavior; functional form; exchange rate interventions; real exchange rate series; exchange rate movements; foreign exchange markets; bilateral exchange rates; exchange rate index; martingale; prediction; standard deviation; exchange rate misalignment; real exchange rate movements; financial statistics; standard errors; exchange rate pass; consistent estimator; outliers; exchange rate changes; real exchange rate misalignment; real exchange rate behavior; maximum likelihood estimator; autocorrelation; exchange rate appreciations; parameter vector; random walk; exchange markets; forecasting; exchange rate instability; exchange rate adjustment; asymptotic distributions; exponential smoothing; real exchange rate appreciations;

    References

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