The dynamics of real exchange rates - A reconsideration
While it is widely agreed that Purchasing Power Parity (PPP) holds as a long-run concept the specific dynamic driving the process is largely build upon a priori economic belief rather than a thorough statistical modeling procedure. The two prevailing time series models, i.e. the exponential smooth transition autoregressive (ESTAR) model and the Markov switching autoregressive (MSAR) model, are both able to support the PPP as a long-run concept. However, the dynamic behavior of real exchange rates implied by these two models is very different and leads to different economic interpretations. In this paper we approach this problem by offering a bootstrap based testing procedure to discriminate between these two rival models. We further study the small sample performance of the test. In an application we analyze several major real exchange rates to shed light on the question which model best describes these processes. This allows us to draw a conclusion about the driving forces of real exchange rates.
|Date of creation:||Jan 2011|
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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.:
- van Norden, Simon, 1996.
"Regime Switching as a Test for Exchange Rate Bubbles,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 11(3), pages 219-251, May-June.
- Simon van Norden, 1995. "Regime Switching as a Test for Exchange Rate Bubbles," Econometrics 9502001, EconWPA, revised 09 Aug 1995.
- Francq, C. & Zakoian, J. -M., 2001.
"Stationarity of multivariate Markov-switching ARMA models,"
Journal of Econometrics,
Elsevier, vol. 102(2), pages 339-364, June.
- Christian Francq & Jean-Michel Zakoïan, 2000. "Stationarity of Multivariate Markov-Switching ARMA Models," Working Papers 2000-32, Centre de Recherche en Economie et Statistique.
- Luis CatÃ£o & Marco Terrones, 2003.
"Fiscal Deficits and Inflation,"
IMF Working Papers
03/65, International Monetary Fund.
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