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Nonlinear adjustment of the real exchange rate towards its equilibrium value: A panel smooth transition error correction modelling

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  • Béreau, Sophie
  • Villavicencio, Antonia López
  • Mignon, Valérie

Abstract

We study the nonlinear dynamics of the real exchange rate towards its behavioral equilibrium value (BEER) using a Panel Smooth Transition Regression model framework. We show that the real exchange rate convergence process in the long-run is characterized by nonlinearities for emerging economies, whereas industrialized countries exhibit a linear pattern. Moreover, there exists an asymmetric behavior of the real exchange rate when facing an over- or an undervaluation of the domestic currency. Finally, our results suggest that the real exchange rate may be unable to unwind alone global imbalances.

Suggested Citation

  • Béreau, Sophie & Villavicencio, Antonia López & Mignon, Valérie, 2010. "Nonlinear adjustment of the real exchange rate towards its equilibrium value: A panel smooth transition error correction modelling," Economic Modelling, Elsevier, vol. 27(1), pages 404-416, January.
    • Handle: RePEc:eee:ecmode:v:27:y:2010:i:1:p:404-416
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    More about this item

    Keywords

    Equilibrium exchange rate BEER model Panel smooth transition regression Panel vector error correction model;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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