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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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  • Sophie Béreau
  • Antonia Lopez Villavicencio
  • Valérie Mignon

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 is unable to unwind alone global imbalances.

Suggested Citation

  • Sophie Béreau & Antonia Lopez Villavicencio & Valérie Mignon, 2008. "Nonlinear Adjustment of the Real Exchange Rate Towards its Equilibrium Value: a Panel Smooth Transition Error Correction Modelling," Working Papers 2008-23, CEPII research center.
    • Handle: RePEc:cii:cepidt:2008-23
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    More about this item

    Keywords

    Equilibrium exchange rate; BEER model; Panel smooth transition regression; Panel vector error correction model;
    All these keywords.

    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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