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Nonlinear Adjustment of the Real Exchange Rate Towards its Equilibrium Value: a Panel Smooth Transition Error Correction Modelling

  • Sophie Béreau
  • Antonia Lopez Villavicencio
  • Valérie Mignon

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 is unable to unwind alone global imbalances.

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Paper provided by CEPII research center in its series Working Papers with number 2008-23.

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Date of creation: Oct 2008
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Handle: RePEc:cii:cepidt:2008-23
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