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An asymmetrical overshooting correction model for G20 nominal effective exchange rates

Author

Listed:
  • Frédérique Bec

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

  • Mélika Ben Salem

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper develops an asymmetrical overshooting correction autoregressive model to capture excessive nominal exchange rate variation. It is based on the widely accepted perception that open economies might react differently to under-evaluation or over-evaluation of their currency because of the trade-off between fostering their net exports and maintaining their international purchasing power. Our approach departs from existing works by considering explicitly both size and sign effects: the strength of the overshooting correction mechanism is indeed allowed to differ between large and small depreciations and appreciations. Evidence of overshooting correction is found in most G20 countries. Formal statistical tests confirm sign and/or size asymmetry of the overshooting correction mechanism in most countries. It turns out that the overshooting correction specification is heterogeneous among countries, even though most of Emerging Market and Developing Economies are found to adjust to over-depreciation whereas the Euro Area and the US are shown to adjust to over-appreciation only.

Suggested Citation

  • Frédérique Bec & Mélika Ben Salem, 2020. "An asymmetrical overshooting correction model for G20 nominal effective exchange rates," Post-Print halshs-03954158, HAL.
    • Handle: RePEc:hal:journl:halshs-03954158
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    JEL classification:

    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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