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Modelling the FF/MM rate by threshold cointegration analysis

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  • Mustapha Baghli

Abstract

This paper investigates a sticky-price model of exchange rate determination: extension of Krugman's target zone model with price inertia applied to the French Franc. A novel theoretical argument is considered, Threshold Cointegration, such that the long-run relationship between the parity and its fundamentals is dormant within a certain range of disequilibria but is restored when the system crosses the boundaries. Over the period 1987-1993, nonlinearities in the FF/DM rate, consistent with the credibility of this target zone, were detected by pointing out a band-reversion mechanism. A shock persistence analysis which highlights a nonlinear reversion of the exchange-rate deviation is also implemented.

Suggested Citation

  • Mustapha Baghli, 2004. "Modelling the FF/MM rate by threshold cointegration analysis," Applied Economics, Taylor & Francis Journals, vol. 36(6), pages 533-548.
  • Handle: RePEc:taf:applec:v:36:y:2004:i:6:p:533-548
    DOI: 10.1080/0003684042000217580
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