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Nonlinearities in the Real Exchange Rates: New Evidence from Developed and Developing Countries

Author

Listed:
  • Yamin Ahmad

    (University of Wisconsin - Whitewater)

  • Ming Chien Lo

    (Metropolitan State University)

  • Olena Staveley-O'Carroll

    (Department of Economics and Accounting, College of the Holy Cross)

Abstract

This paper investigates nonlinearities in the dynamics of real exchange rates. We use Monte Carlo simulations to establish the size properties of the Ter�svirta-Anderson (1992) and the Ter�svirta (1994) test, when the dynamics of the real exchange rate is infl?uenced by an exogenous process. In addition, we examine the modifi?cation proposed by Ahmad, Lo and Mykhaylova (2013; Journal of International Economics) to show that the modifi?ed nonlinearity test performs much better than the original in both Monte Carlo exercises and in the actual data on 1431 bilateral real exchange rate series. Finally, we investigate the dynamics of the real exchange rate for both developed and developing countries using the modifi?ed test for the recent ?floating period. In general, the results fi?nds a greater incidence of nonlinear dynamics for developing country real exchange rates.

Suggested Citation

  • Yamin Ahmad & Ming Chien Lo & Olena Staveley-O'Carroll, 2018. "Nonlinearities in the Real Exchange Rates: New Evidence from Developed and Developing Countries," Working Papers 1813, College of the Holy Cross, Department of Economics.
    • Handle: RePEc:hcx:wpaper:1813
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    File URL: https://hcapps.holycross.edu/hcs/RePEc/hcx/HC1813-StavleyOCarroll_ExchangeRates.pdf
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    Keywords

    real exchange rate dynamics; nonlinear dynamics; smooth transition estimation; Monte Carlo analysis;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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