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Are Southeast Asian Real Exchange Rates Mean Reverting?

  • Frédérique Bec


    (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)

  • Songlin Zeng

    (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)

Since the late nineties, both theoretical and empirical analysis devoted to the real exchange rate suggest that their dynamics might be well approximated by nonlinear models. This paper examines this possibility for post-1970 monthly ASEAN-5 data, extending the existing research in two directions. First, we use recently developed unit root tests which allow for more flexible nonlinear stationary models under the alternative than the commonly used Self-Exciting Threshold or Exponantial Smooth Transition AutoRegressions. Second, while different nonlinear models survive the mis-specification tests, a Monte Carlo experiment from generalized impulse response functions is used to compare their relative relevance. Our results i) support the nonlinear mean-reverting hypothesis, and hence the Purchasing Power Parity, in most of the ASEAN-5 countries and ii) point to the Multiple Regime-Logistic Smooth Transition and the Exponantial Smooth Transition AutoRegression models as the most likely data generating processes of these real exchange rates.

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Paper provided by HAL in its series Working Papers with number hal-00685812.

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Date of creation: 07 Feb 2012
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Publication status: Published in 2012
Handle: RePEc:hal:wpaper:hal-00685812
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  1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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  4. Frédérique Bec & Anders Rahbek, 2004. "Vector equilibrium correction models with non-linear discontinuous adjustments," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 628-651, December.
  5. Bec, Frederique & Guay, Alain & Guerre, Emmanuel, 2008. "Adaptive consistent unit-root tests based on autoregressive threshold model," Journal of Econometrics, Elsevier, vol. 142(1), pages 94-133, January.
  6. Frederique Bec & Melika Ben Salem & Marine Carrasco, 2004. "Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model," RCER Working Papers 509, University of Rochester - Center for Economic Research (RCER).
  7. Lo, Ming Chien & Zivot, Eric, 2001. "Threshold Cointegration And Nonlinear Adjustment To The Law Of One Price," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 533-576, September.
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  11. Venus Khim-sen Liew & Ahmad Zubaidi Baharumshah & Terence Tai-leung Chong, 2003. "Are Asian Real Exchange Rates Stationary?," International Finance 0307002, EconWPA, revised 01 Nov 2004.
  12. Balke, Nathan S. & Fomby, Thomas B., 1992. "Threshold cointegration," Working Papers 9209, Federal Reserve Bank of Dallas.
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  17. Frédérique Bec & Anders Rahbek & Neil Shephard, 2005. "The Autoregressive Conditional Root (ACR) Model," Working Papers 2005-26, Centre de Recherche en Economie et Statistique.
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  29. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
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