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Are Real Exchange Rates Nonlinear or Nonstationary? Evidence from a new Threshold Unit Root Test

  • Erdem Basci

    (Central Bank of Turkey)

  • Mehmet Caner

    (University of Pittsburgh)

We analyze the post-float real exchange rates for a group of OECD countries using the newly developed threshold test and tests for unit roots against stationary but nonlinear alternative by Caner and Hansen ( 2001). These tools help us disentangle the nonlinearity from the nonstationarity rigorously for the first time in the literature. After applying the threshold test and unit root tests: we find evidence for non-linearity of exchange rates. Specifically real exchange rates behave like a unit root in a band and when the depreciation or appreciation of the currency against $US exceeds the boundaries of the band , the real exchange rates are mean-reverting. The threshold value is treated as unknown and estimated in the model.

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Paper provided by EconWPA in its series International Finance with number 0512001.

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Date of creation: 09 Dec 2005
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Handle: RePEc:wpa:wuwpif:0512001
Note: Type of Document - pdf
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  1. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
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