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

  • Nakagawa, Hironobu
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    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.

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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 29 (2010)
    Issue (Month): 5 (September)
    Pages: 770-790

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    Handle: RePEc:eee:jimfin:v:29:y:2010:i:5:p:770-790
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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