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Nonlinear adjustment of the real exchange rate towards its equilibrium value: A panel smooth transition error correction modelling

  • Béreau, Sophie
  • Villavicencio, Antonia López
  • Mignon, Valérie

We study the nonlinear dynamics of the real exchange rate towards its behavioral equilibrium value (BEER) using a Panel Smooth Transition Regression model framework. We show that the real exchange rate convergence process in the long-run is characterized by nonlinearities for emerging economies, whereas industrialized countries exhibit a linear pattern. Moreover, there exists an asymmetric behavior of the real exchange rate when facing an over- or an undervaluation of the domestic currency. Finally, our results suggest that the real exchange rate may be unable to unwind alone global imbalances.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 1 (January)
Pages: 404-416

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:1:p:404-416
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