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Real exchange rates and real interest rates : a nonlinear perspective

  • Frédérique BEC

    (CREST-ENSAE)

  • Mélika BEN SALEM

    (OEP, Université Marne-la-Vallée)

  • Ronald MACDONALD

    (University of Glasgow)

In this paper we use a Threshold AutoRegressive (TAR) model to capture the nonlinear dynamics of monthly real effective exchange rate data for the G7 countries. The novelty of our approach relates to the use of the real interest differential as the switching variable. This choice allows us to consider jointly the nonlinearity and nonstationarity issues using récent advances in asymptotic theory. We find that the null of linearity is easily rejected against the nonlinear model for ail currencies considered. Further, for five out of the seven countries, where the null of unit root is rejected, we report evidence of quite rapid mean reversion.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2006024.

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Length: 18
Date of creation: 01 Jun 2006
Date of revision:
Handle: RePEc:ctl:louvre:2006024
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  1. repec:ner:tilbur:urn:nbn:nl:ui:12-3108738 is not listed on IDEAS
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  18. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  19. Lawrence H. Officer, 1982. "The Purchasing-Power-Parity Theory of Gerrard de Malynes," History of Political Economy, Duke University Press, vol. 14(2), pages 256-259, Summer.
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  21. Berka, Martin, 2005. "General Equilibrium Model of Arbitrage Trade and Real Exchange Rate Persistence," MPRA Paper 234, University Library of Munich, Germany.
  22. Schnatz, Bernd & Vijselaar, Focco & Osbat, Chiara, 2003. "Productivity and the ('synthetic') euro-dollar exchange rate," Working Paper Series 0225, European Central Bank.
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