Equilibrium exchange rate determination and multiple structural changes
The large appreciation and depreciation of the US dollar in the 1980s stimulated an important debate on the usefulness of unit root tests in the presence of structural breaks. In this paper, we propose a simple model to describe the evolution of the real exchange rate. We then propose a more general smooth transition (STR) function than has hitherto been employed, which is able to capture structural changes along the (long-run) equilibrium path, and show that this is consistent with our economic model. Our framework allows for a gradual adjustment between regimes and allows for under- and/or over-valued exchange rate adjustments. Using monthly and quarterly data for up to twenty OECD countries, we apply our methodology to investigate the univariate time series properties of CPI-based real exchange rates with both the U.S. dollar and German mark as the numeraire currencies. The empirical results show that, for more than half of the quarterly series, the evidence in favour of the stationarity of the real exchange rate was clearer in the sub-sample period post-1980.
|Date of creation:||May 2010|
|Contact details of provider:|| Postal: Adam Smith Building, Glasgow G12 8RT|
Phone: 0141 330 4618
Fax: 0141 330 4940
Web page: http://www.gla.ac.uk/schools/business/research/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wu, Yangru, 1996. "Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 54-63, February.
- Michael Bleaney & Stephen J. Leybourne, 2003. "Real Exchange Rate Dynamics Under The Current Float: A Re-Examination," Manchester School, University of Manchester, vol. 71(2), pages 156-171, 03.
- Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
- Eric Zivot & Donald W.K. Andrews, 1990.
"Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis,"
Cowles Foundation Discussion Papers
944, Cowles Foundation for Research in Economics, Yale University.
- Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-270, July.
- Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Mehmet Caner & Bruce E. Hansen, 2001.
"Threshold Autoregression with a Unit Root,"
Econometric Society, vol. 69(6), pages 1555-1596, November.
- Perron, P, 1988.
"The Great Crash, The Oil Price Shock And The Unit Root Hypothesis,"
338, Princeton, Department of Economics - Econometric Research Program.
- Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
- Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November.
- Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 1999.
"Long memory or structural breaks: can either explain nonstationary real exchange rates under the current float?,"
Journal of International Financial Markets, Institutions and Money,
Elsevier, vol. 9(4), pages 359-376, November.
- Christopher F. Baum & John T. Barkoulas & Mustafa Caglayan, 1998. "Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current float?," Boston College Working Papers in Economics 380, Boston College Department of Economics.
- van Dijk, D.J.C. & Terasvirta, T. & Franses, Ph.H.B.F., 2000.
"Smooth transition autoregressive models - A survey of recent developments,"
Econometric Institute Research Papers
EI 2000-23/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
- van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," SSE/EFI Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
- Frankel, Jeffrey A & Rose, Andrew K, 1996.
"Currency Crashes in Emerging Markets: Empirical Indicators,"
CEPR Discussion Papers
1349, C.E.P.R. Discussion Papers.
- Jeffrey J. Frankel and Andrew K. Rose., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers C96-062, University of California at Berkeley.
- Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," NBER Working Papers 5437, National Bureau of Economic Research, Inc.
- Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers 233424, University of California-Berkeley, Department of Economics.
- Robert Sollis, 2004.
"Evidence on purchasing power parity from univariate models: the case of smooth transition trend-stationarity,"
Money Macro and Finance (MMF) Research Group Conference 2003
91, Money Macro and Finance Research Group.
- Robert Sollis, 2005. "Evidence on purchasing power parity from univariate models: the case of smooth transition trend-stationarity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 79-98.
- Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August.
- Sollis, Robert & Leybourne, Stephen & Newbold, Paul, 2002. "Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 686-700, August.
- Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
- Frankel, Jeffrey A. & Rose, Andrew K., 1996.
"Currency crashes in emerging markets: An empirical treatment,"
Journal of International Economics,
Elsevier, vol. 41(3-4), pages 351-366, November.
- Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
- Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
- Papell, David H., 2002.
"The great appreciation, the great depreciation, and the purchasing power parity hypothesis,"
Journal of International Economics,
Elsevier, vol. 57(1), pages 51-82, June.
- David Papell, 1998. "The Great Appreciation, the Great Depreciation, and the Purchasing Power Parity Hypothesis," Working Papers 30, Oesterreichische Nationalbank (Austrian Central Bank).
- MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January.
- Jayasri Dutta, 2002. "Dread of Depreciation; Measuring Real Exchange Rate Interventions," IMF Working Papers 02/63, International Monetary Fund.
- Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals; A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
- Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June.
When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2010_14. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jeanette Findlay)
If references are entirely missing, you can add them using this form.