This paper investigates the presence of periodically collapsing rational bubbles in exchange rates for a sample of industrialised countries. A periodically collapsing rational bubble is defined as an explosive deviation from economic fundamentals with distinct expansion and contraction phases in finite time. By using Markov-switching regime models we were not able to find robust evidence of a bubble driving the exchange rate away from fundamentals. Moreover, the results also revealed significant non-linearities and different regimes. The importance of these findings suggests that linear monetary models may not be appropriate to examine exchange rate movements.
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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number
0604.
Length: Date of creation: Sep 2006 Date of revision: Handle: RePEc:ukc:ukcedp:0604
Contact details of provider: Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP Phone: +44 (0)1227 764000 Fax: +44 (0)1227 827850 Web page: http://www.ukc.ac.uk/economics/
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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