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The behaviour of the real exchange rate: Evidence from regression quantiles

  • Kleopatra Nikolaou

    (Warwick Business School)

Registered author(s):

    We test for mean reversion in real exchange rates using a recently developed unit root test for non- normal processes based on quantile autoregression inference in semi-parametric and non-parametric settings. The quantile regression approach allows us to directly capture the impact of di¤erent magnitudes of shocks that hit the real exchange rate, conditional on its past history, and can detect asymmetric, dynamic adjustment of the real exchange rate towards its long run equilibrium. Our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate, with half lives less than one year in the extreme quantiles. Mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium. However, in the absence of shocks no mean reversion is observed. Finally, we report asymmetries in the dynamic adjustment of the RER

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    File URL: http://repec.org/mmf2006/up.32136.1144609040.pdf
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    Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 46.

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    Date of creation: 02 Feb 2007
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    Handle: RePEc:mmf:mmfc06:46
    Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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