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What is the Shape of Real Exchange Rate Nonlinearity?

  • Norman, Stephen
  • Phillips, Kerk L.

Evidence that real exchange rate dynamics can be described using models which exhibit nonlinear mean reversion has been mounting over the past several years. This paper attempts to better understand the shape of real exchange rate nonlinearity through the use of the smooth transition autoregressive (STAR) model and the newly proposed skewed generalized error (SGE) transition function. The advantage of this transition function is that is nests popularly used transition functions through simple parameter constraints. This allows the use of nested model selection tests. It is shown that more flexible transition functions are preferred in many cases over the commonly used exponential transition function. The results suggest that most of the real exchange rates studied in this paper are better described by discrete threshold models rather than STAR models.

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File URL: http://mpra.ub.uni-muenchen.de/23504/1/MPRA_paper_23504.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23504.

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Date of creation: May 2009
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Handle: RePEc:pra:mprapa:23504
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  1. Frédérique BEC & Mélika BEN SALEM & Marine CARRASCO, 2010. "Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime star Model," Annales d'Economie et de Statistique, ENSAE, issue 99-100, pages 395-427.
  2. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
  3. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
  4. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers 1672, C.E.P.R. Discussion Papers.
  5. Joon Y. Park & Mototsugu Shintani, 2005. "Testing for a Unit Root against Transitional Autoregressive Models," Vanderbilt University Department of Economics Working Papers 05010, Vanderbilt University Department of Economics.
  6. repec:ebl:ecbull:v:3:y:2005:i:23:p:1-11 is not listed on IDEAS
  7. Theodossiou, Panayiotis & McDonald, James B. & Hansen, Christian B., 2007. "Some Flexible Parametric Models for Partially Adaptive Estimators of Econometric Models," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1, pages 1-20.
  8. Walter Enders & Selahattin Dibooglu, 2001. "Long-Run Purchasing Power Parity with Asymmetric Adjustment," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 433-445, October.
  9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  10. Sollis, Robert & Leybourne, Stephen & Newbold, Paul, 2002. "Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 686-700, August.
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