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Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model

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  • Frédérique Bec
  • Mélika Ben Salem
  • Marine Carrasco

Abstract

Recent Studies on general equilibrium models with transaction costs show that the dynamics of the real exchange rate are necessarily nonlinear. Our contribution to the literature on nonlinear price adjustment mechanisms is threefold. First, we model the real exchange rates by a Multi-Regime Logistic Smooth Transition AutoRegression (MR-LSTAR), allowing for both ESTAR-type and SETAR-type dynamics. This choice is motivated by the fact that even the theoretical models, which predict a smooth behavior for the real exchange rate, do not rule out the possibility of a discontinuous adjustment as a limit case. Second, We propose two classes of unit-root tests against this MR-LSTAR alternative, based respectively on the likelihood and on an auxiliary model. Their asymptotic distributions are derived analytically. Third, when applied to 28 bilateral real exchange rates, our tests reject the null hypothesis of a unit root for eleven series bringing evidence in favor of the purchasing power parity.
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Suggested Citation

  • 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.
  • Handle: RePEc:cir:cirwor:2009s-18
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Half-life; purchasing power parity; mixing conditions; smooth transition autoregressive model; unit-root test; real exchange rate; Demi-vie; parité du pouvoir d'achat; conditions de mélange; modèle autorégressif à transition lisse; test d'unité racinaire; taux de change réel;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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