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Real Exchange Rates and Switching Regimes

Listed author(s):
  • Bergman, U. Michael

    ()

    (Department of Economics, Lund University)

  • Hansson, Jesper

    (Department of Economics, Lund University)

Registered author(s):

    We suggest that the real exchange rate between the major currencies in the post-Bretton Woods period can be described by a stationary, two state Markov switching AR(1) model. Based on the forecast performance, both in-sample and out-of-sample, we find that this model out-performs two competing models where the real exchange rate is non-stationary. We also find that the existence of different regimes, as in the Markov switching model, is consistent with the common finding of unit roots in the real exchange rate.

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    File URL: http://swopec.hhs.se/lunewp/papers/lunewp1999_004.ps
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    File URL: http://swopec.hhs.se/lunewp/papers/lunewp1999_004.pdf
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    Paper provided by Lund University, Department of Economics in its series Working Papers with number 1999:4.

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    Length: 21 pages
    Date of creation: 28 Sep 1999
    Date of revision: 08 Jun 2000
    Handle: RePEc:hhs:lunewp:1999_004
    Contact details of provider: Postal:
    Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden

    Phone: +46 +46 222 0000
    Fax: +46 +46 2224613
    Web page: http://www.nek.lu.se/en

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    1. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    2. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-259, April.
    3. Charles Engel, 1998. "Long-Run PPP May Not Hold After All," Discussion Papers in Economics at the University of Washington 0050, Department of Economics at the University of Washington.
    4. Fritsche, Charmaine Pereira & Wallace, Myles, 1997. "Forecasting the exchange rate PPP versus a random walk," Economics Letters, Elsevier, vol. 54(1), pages 69-74, January.
    5. Lothian, James R., 1997. "Multi-country evidence on the behavior of purchasing power parity under the current float," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 19-35, February.
    6. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers 347, Princeton, Department of Economics - Econometric Research Program.
    7. 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.
    8. Edison, Hali J. & Gagnon, Joseph E. & Melick, William R., 1997. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 1-17, February.
    9. Engel, Charles & Kim, Chang-Jin, 1999. "The Long-Run U.S./U.K. Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 335-356, August.
    10. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-320, July.
    11. Engel, Charles, 1994. "Can the Markov switching model forecast exchange rates?," Journal of International Economics, Elsevier, vol. 36(1-2), pages 151-165, February.
    12. Ott, Mack, 1996. "Post Bretton Woods deviations from purchasing power parity in G7 exchange rates--an empirical exploration," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 899-924, December.
    13. Creedy, John & Lye, Jenny & Martin, Vance L, 1996. "A Non-linear Model of the Real US-UK Exchange Rate," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 669-686, Nov.-Dec..
    14. Hansen, Bruce E, 1996. "Erratum: The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 195-198, March-Apr.
    15. Siddique, Akhtar & Sweeney, Richard J., 1998. "Forecasting real exchange rates1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 63-70, February.
    16. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
    17. 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.
    18. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
    19. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
    20. Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-112, January.
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