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Nonlinear dynamics in exchange rate deviations from the monetary fundamentals: An empirical study

  • Kim, Bong-Han
  • Min, Hong-Ghi
  • Moh, Young-Kyu

This paper reexamines empirical performance of the monetary exchange rate model with nonlinear dynamics of exchange rate deviation from the monetary fundamentals. First, we apply unit root test of Park and Shintani (2005) to post-Bretton Woods exchange rate data and able to reject the null of unit root deviation from monetary fundamentals against alternative hypothesis of nonlinear stationary process for deutschemark, pound, and Swiss franc. Our empirical results find that exchange rates show high degree of mean-reversion with larger deviation and long periods of overvaluation and undervaluation of dollar. We also find empirical evidence of predictability of the monetary fundamentals at longer horizons.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 5 (September)
Pages: 1167-1177

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:1167-1177
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  5. Frédérique Bec & Mélika Ben Salem & Marine Carrasco, 2009. "Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model," CIRANO Working Papers 2009s-18, CIRANO.
  6. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
  7. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  8. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
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  17. Jeremy Berkowitz & Lorenzo Giorgianni, 2001. "Long-Horizon Exchange Rate Predictability?," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 81-91, February.
  18. Chinn, Menzie D. & Meese, Richard A., 1995. "Banking on currency forecasts: How predictable is change in money?," Journal of International Economics, Elsevier, vol. 38(1-2), pages 161-178, February.
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  21. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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