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Nonlinear Exchange Rate Adjustment in the Enlarged Eurozone: Evidence and Implications for Candidate Countries

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  • Nikolaos Giannellis
  • Athanasios P. Papadopoulos

Abstract

This paper sheds light on the importance of the validity of PPP hypothesis for the accessing process of the candidate countries towards EMU. The evidence of nonlinear adjustment in real exchange rates suggests the estimation of a nonlinear SETAR model. While linear half-life estimates are biased upward (five years on average), SETAR half-life estimates imply a faster reverting process (1.5 years on average). Moreover, we found that TPI-based real exchange rates are more appropriate than CPI-based real exchange rates in testing for PPP hypothesis. For the cluster of EMU countries and for the pre-EMU period, our nonlinear model confirms stationarity for the majority of the TPI-based real exchange rates with half-life estimates less than a year. Copyright © 2010 Blackwell Publishing Ltd.

Suggested Citation

  • Nikolaos Giannellis & Athanasios P. Papadopoulos, 2010. "Nonlinear Exchange Rate Adjustment in the Enlarged Eurozone: Evidence and Implications for Candidate Countries," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 741-757, September.
  • Handle: RePEc:bla:reviec:v:18:y:2010:i:4:p:741-757
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    References listed on IDEAS

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    Cited by:

    1. Giannellis, Nikolaos, 2013. "Asymmetric behavior of inflation differentials in the euro area: Evidence from a threshold unit root test," Research in Economics, Elsevier, pages 133-144.
    2. Nikolaos Giannellis & Minoas Koukouritakis, 2016. "Eurozone's Leader and its Followers: Are their Markets Integrated Enough?," Working Papers 1607, University of Crete, Department of Economics.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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