IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Searching for Nonlinearities in Real Exchange Rates?

  • Yamin Ahmad


    (Department of Economics, University of Wisconsin - Whitewater)

  • Stuart Glosser


    (Department of Economics, University of Wisconsin - Whitewater)

A recent innovation in modeling exchange rates has been the use of nonlinear techniques such as threshold autoregressive models and its smooth transition variants. This paper investigates the smooth transition autoregressive (STAR) modeling strategy in an application to real exchange rates. The key findings are as follows. First, using the methodology advocated by Teräsvirta (1994), we find evidence of nonlinear dynamics for several of the spot dollar real exchange rates using monthly data on five of the G7 countries. However, once estimated, we find that the STAR specification is appropriate for only one of the three exchange rate series indicated to be an ESTAR process. Moreover, using simulations, we show that the underlying methodology used to detect nonlinearities in the data exhibit substantial size biases, which we attribute to influential observations. We also investigate an alternative nonlinear specification and find that we can model the dollar-sterling and the dollar-lira real exchange rates better as an open-loop TAR process instead of a SETAR process.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: Full text
Download Restriction: no

Paper provided by UW-Whitewater, Department of Economics in its series Working Papers with number 09-01.

in new window

Length: 29 pages
Date of creation: Nov 2007
Date of revision: Jan 2009
Publication status: published in Applied Economics, 43 (15), May 2011, pp. 1829 - 1845
Handle: RePEc:uww:wpaper:09-01
Contact details of provider: Postal: Whitewater, WI 53190-1750
Phone: (414) 472-1361
Web page:

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Patel, Jayendu, 1990. "Purchasing Power Parity as a Long-Run Relation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 367-79, Oct.-Dec..
  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. Taylor, Alan M. & Taylor, Mark P, 2004. "The Purchasing Power Parity Debate," CEPR Discussion Papers 4495, C.E.P.R. Discussion Papers.
  4. Lutz Kilian & Mark P. Taylor, 2001. "Why is it so difficult to beat the Random Walk Forecast of Exchange Rates?," Tinbergen Institute Discussion Papers 01-031/4, Tinbergen Institute.
  5. Enders, Walter, 1988. "ARIMA and Cointegration Tests of PPP under Fixed and Flexible Exchange Rate Regimes," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 504-08, August.
  6. JamesR. Lothian & MarkP. Taylor, 2008. "Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod-Balassa-Samuelson Effect?," Economic Journal, Royal Economic Society, vol. 118(532), pages 1742-1763, October.
  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  8. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-48, September.
  9. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:uww:wpaper:09-01. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yamin Ahmad)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.