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What is the Shape of Real Exchange Rate Nonlinearity?

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  • Norman, Stephen
  • Phillips, Kerk L.

Abstract

Evidence that real exchange rate dynamics can be described using models which exhibit nonlinear mean reversion has been mounting over the past several years. This paper attempts to better understand the shape of real exchange rate nonlinearity through the use of the smooth transition autoregressive (STAR) model and the newly proposed skewed generalized error (SGE) transition function. The advantage of this transition function is that is nests popularly used transition functions through simple parameter constraints. This allows the use of nested model selection tests. It is shown that more flexible transition functions are preferred in many cases over the commonly used exponential transition function. The results suggest that most of the real exchange rates studied in this paper are better described by discrete threshold models rather than STAR models.

Suggested Citation

  • Norman, Stephen & Phillips, Kerk L., 2009. "What is the Shape of Real Exchange Rate Nonlinearity?," MPRA Paper 23504, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23504
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    References listed on IDEAS

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    More about this item

    Keywords

    exchange rate dynamics; mean reversion;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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