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Modelling Ireland’s exchange rates: from EMS to EMU

Author

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  • Bond, Derek
  • Harrison, Michael J.
  • O’Brien, Edward

Abstract

This paper attempts to model the nominal and real exchange rate for Ireland, relative to Germany and the UK from 1975 to 2003. It offers an overview of the theory of purchasing power parity (PPP), focusing particularly on likely sources of nonlinearity. Potential difficulties in placing the analysis in the standard I(1)/I(0) framework are highlighted and comparisons with previous Irish studies are made. Tests for fractional integration and nonlinearity, including random field regressions, are discussed and applied. The results obtained highlight the likely inadequacies of the standard cointegration and STAR approaches to modelling, and point instead to multiple structural changes models. Using this approach, both bilateral nominal exchange rates are effectively modelled, and in the case of Ireland and Germany, PPP is found to be valid not only in the long run, but also in the medium term. JEL Classification: C22, C51, F31, F41

Suggested Citation

  • Bond, Derek & Harrison, Michael J. & O’Brien, Edward, 2007. "Modelling Ireland’s exchange rates: from EMS to EMU," Working Paper Series 823, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2007823
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp823.pdf
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    Cited by:

    1. D. (Derek) Bond & Michael J. Harrison & Edward J. (Edward Joseph) O'Brien, 2009. "Exploring long memory and nonlinearity in Irish real exchange Rates using tests based on semiparametric estimation," Working Papers 200901, School of Economics, University College Dublin.
    2. Burcu Kıran, 2012. "Nonlinearity and Fractional Integration in the US Dollar/Euro Exchange Rate," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(3), pages 325-334, June.

    More about this item

    Keywords

    fractional Dickey-Fuller tests; multiple structural changes models.; purchasing power parity; random field regression; smooth transition autoregression;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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