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Nonlinear Exchange Rate Adjustment in the Enlarged Euro zone. Evidence and Implications for Candidate Countries

  • Nikolaos Giannellis

    ()

    (Department of Economics, University of Crete, Greece)

  • Athanasios Papadopoulos

    ()

    (Department of Economics, University of Crete, Greece)

This paper sheds light on the importance of the validity of PPP hypothesis for the accessing process of the candidate countries towards EMU. The evidence of nonlinear adjustment in real exchange rates insists the estimation of a nonlinear SETAR model. While linear half-life estimates are biased upward (5 years on average), SETAR half-life estimates imply a faster reverting process (1.5 years on average). As a consequence, the evidence in favor of PPP hypothesis and the fast equilibrium adjustment of real exchange rates (setting Euro as the numeraire currency) imply that candidate countries follow a normal integration process towards EMU.

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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0718.

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Length: 27 pages
Date of creation: 10 Jan 2007
Date of revision:
Handle: RePEc:crt:wpaper:0718
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  1. Chowdhury, Ibrahim & Sarno, Lucio & Taylor, Mark P, 2002. "Non-Linear Dynamics in Deviations from the Law of One Price: A Broad-Based Empirical Study," CEPR Discussion Papers 3377, C.E.P.R. Discussion Papers.
  2. Koedijk, C.G. & Tims, B. & van Dijk, M.A., 2004. "Purchasing Power Parity and the Euro Area," ERIM Report Series Research in Management ERS-2004-025-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  3. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
  4. Kim, Jaebeom & Ogaki, Masao, 2004. "Purchasing Power Parity for Traded and Non-traded Goods: A Structural Error Correction Model Approach," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(1), pages 1-25, March.
  5. Jaebeom Kim, 2004. "Half-lives of Deviations from PPP: Contrasting Traded and Nontraded Components of Consumption Baskets," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 162-168, 02.
  6. Claude Lopez & David H. Papell, 2003. "Convergence to Purchasing Power Parity at the Commencement of the Euro," University of Cincinnati, Economics Working Papers Series 2003-08, University of Cincinnati, Department of Economics.
  7. Sideris, Dimitrios A., 2008. "Foreign exchange intervention and equilibrium real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 344-357, October.
  8. Xu, Zhenhui, 2003. "Purchasing power parity, price indices, and exchange rate forcasts," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 105-130, February.
  9. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
  10. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February.
  11. Sabate, Marcela & Gadea, Maria Dolores & Serrano, Jose Maria, 2003. "PPP and structural breaks. The peseta-sterling rate, 50 years of a floating regime," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 613-627, October.
  12. Lucio Sarno & Ibrahim Chowdhury, 2003. "The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(3), pages 295-333, November.
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