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Investigating nonlinearities in real exchange rate adjustment: Threshold cointegration and the dynamics of exchange rates and relative prices

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  • Nakagawa, Hironobu

Abstract

Motivated by growing evidence of nonlinear mean-reverting behavior in real exchange rates, this paper investigates the underlying dynamics in the context of a threshold vector error correction model (TVECM) of nominal exchange rate and relative prices. Unlike univariate models, our nonlinear multivariate framework takes into explicit account the joint behavior and individual dynamics of the nominal exchange rate and relative prices when these two key variables are threshold cointegrated. Our empirical application unravels their relative contribution to mean reversion and underscores the importance of capturing their interactions in investigating the nonlinear adjustment toward purchasing power parity.

Suggested Citation

  • Nakagawa, Hironobu, 2010. "Investigating nonlinearities in real exchange rate adjustment: Threshold cointegration and the dynamics of exchange rates and relative prices," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 770-790, September.
  • Handle: RePEc:eee:jimfin:v:29:y:2010:i:5:p:770-790
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    Cited by:

    1. Andrew Phiri, 2017. "Nonlinear adjustment effects in the purchasing power parity," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 60(2), pages 14-38.
    2. Olumuyiwa Tolulope Apanisile & Olusola Mathew Oloba, 2020. "Asymmetric effect of exchange rate changes on cross-border trade in Nigeria," Future Business Journal, Springer, vol. 6(1), pages 1-9, December.
    3. Maria Eleftheriou & Nikolas A. Müller-Plantenberg, 2018. "The Purchasing Power Parity Fallacy: Time to Reconsider the PPP Hypothesis," Open Economies Review, Springer, vol. 29(3), pages 481-515, July.
    4. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.
    5. Deokwoo Nam, 2011. "The Roles of Nominal Exchange Rate and Relative Price Adjustments in PPP Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 775-785, June.

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