Real exchange rates and real interest rates: a nonlinear perspective

Bec, F., Salem, M.B. and Macdonald, R. (2006) Real exchange rates and real interest rates: a nonlinear perspective. Recherches Economiques de Louvain, 72(2), pp. 177-194. (doi:10.3917/rel.722.0177)

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Abstract

In this paper we use a Threshold AutoRegressive (TAR) model to capture the nonlinear dynamics of monthly real effective exchange rate data for the G7 countries. The novelty of our approach relates to the use of the real interest differential as the switching variable. This choice allows us to consider jointly the nonlinearity and nonstationarity issues using recent advances in asymptotic theory. We find that the null of linearity is easily rejected against the nonlinear model for all currencies considered. Further, for five out of the seven countries, where the null of unit root is rejected, we report evidence of quite rapid mean reversion.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:MacDonald, Professor Ronald
Authors: Bec, F., Salem, M.B., and Macdonald, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Recherches Economiques de Louvain
Publisher:De Boeck Universite
ISSN:0770-4518
ISSN (Online):1782-1495

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