No CrossRef data available.
Article contents
Real exchange rates and real interest rates : a nonlinear perspective
Published online by Cambridge University Press: 17 August 2016
Summary
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.
Résumé:
Dans cet article, nous retenons un modèle auto-régressif à seuils de type TAR afin de capturer la dynamique non linéaire des taux de change réels effectifs des pays du G7. L'originalité de notre approche provient de l'utilisation du différentiel de taux d'intérêt réel comme variable de transition entre les régimes. Ce choix nous permet de considérer les hypothèses de non-linéarité et de non-stationarité conjointement, en exploitant les avancées récentes de la théorie économétrique. L'hypothèse nulle de linéarité est fortement rejetée en faveur du modèle à seuils pour toutes les devises étudiées. De plus, pour cinq des sept pays considérés, l'hypothèse de racine unitaire est aussi rejetée et les demi-vies du taux de change réel sont inférieures à un an et demi.
Keywords
- Type
- Research Article
- Information
- Recherches Économiques de Louvain/ Louvain Economic Review , Volume 72 , Issue 2 , 2006 , pp. 177 - 194
- Copyright
- Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2006
Footnotes
*
We wish to thank, with usual disclaimers, two anonymous referees for very useful comments on a previous version of this work. Frédérique Bee is grateful to the funding by Danish Social Sciences Research Council (2114-04-0001).
**
CREST-ENSAE, 3 avenue Pierre Larousse, 92245 Malakoff Cedex, France. Email: [email protected]
***
Email: [email protected]
****
Email: [email protected]
References
Alexius, A.
(2005), “Productivity shocks and real
exchange rates”, Journal of Monetary
Economics, 52, pp.
555–566.Google Scholar
Andrews, D.
(1991), “Heteroskedasticity and
autocorrelation consistent co-variance matrix
estimation”, Econornetrica,
59, pp.
817–858.Google Scholar
Bec, F., Ben
Salem, M. and Rahbek, A.
(2004), “Nonlinear adjustment towards the
Purchasing Power Parity relation : a multivariate
approach” , Manuscript,
CREST,
Paris.Google Scholar
Bergman, U. and
Hansson, J.
(2005), “Real exchange rates and switching
regimes”, Journal of International Money and
Finance, 24, pp.
121–138.Google Scholar
Berka, M.
(2004), “General equilibrium model of
arbitrage trade and real exchange rate persistence”,
Manuscript, University of British
Columbia,
Vancouver.Google Scholar
Bessec, M.
(2002), “Mean reversion versus adjustment to
PPP : the two regimes of exchange rates dynamics under the EMS,
1979–1998”, Economic Modelling,
20, pp.
141–164.Google Scholar
Caner, M. and
Hansen, B.
(2001), “Threshold autoregression with a unit
root”, Econornetrica,
69, pp.
1555–1596.Google Scholar
Coughlin, C. and
Koedijk, K.
(1990), “What do we know about the long-run
real exchange rate?”, St. Louis Federal Reserve
Bank Review, 72, pp.
36–48.Google Scholar
Dickey, D. and
Fuller, W.
(1981), “Likelihood ratio statistics for
autoregressive time series with an unit root”,
Econornetrica, 49, pp.
1057–1072.Google Scholar
Doue, R., Guillin, A. and
Moulines, E.
(2004), “Limit theorems for subgeo-metric
Markov chains”, Manuscript,
École Polythechnique,
Palaiseau.Google Scholar
Dumas, B.
(1992), “Dynamic equilibrium and the real
exchange rate ire a spatially separated world”,
Review of Financial Studies, 5, pp.
153–180.Google Scholar
Edison, H. and
Pauls, B.
(1993), “A re-assessment of the relationship
between real exchange rates and real interest rates :
1974’90”, Journal of Monetary Economics,
31, pp.
165–187.Google Scholar
Edison, H. and
Melick, W.
(1999), “Alternative approaches to real
exchange rates and real interest rates : three up and three
down”, International Journal of Finance and
Economics, 4, pp.
93–111.Google Scholar
Enders, W. and
Granger, C.
(1998), “Unit-root tests and asymmetric
adjustment with an example using the term structure of interest
rates”, Journal of Business and Economic
Statistics, 16, pp.
304–311.Google Scholar
Froot, K. and
Rogoff, K.
(1995), “Perspectives on PPP and long-run
real exchange rates”, in Grossman, G. and
Rogoff, K. (eds.),
Handbook of International Economics vol.3,
Amsterdam,
Elsevier/North-Holland, pp.
1647–1688.Google Scholar
Gagnon, J.
(1996), “Net foreign assets and equilibrium
exchange rates : panel evidence”, International
Finance Discussion Paper n° 574, Board of Governors of the Federal
Reserve System,
Washington.Google Scholar
Gonzalez, M. and
Gonzalo, J.
(1998), “Threshold unit root
models”, Manuscript,
University Carlos III,
Madrid.Google Scholar
Gottschalk, J.
(2001), “Measuring expected inflation and the
ex-ante real interest rate in the Euro area using structural
VARs”, Working Paper n° 1067,
Kiel Institute of World Economics,
Kiel.Google Scholar
Granger, C. and
Terasvirta, T.
(1993), Modelling non-linear economic
relationships, Oxford,
Oxford University
Press.Google Scholar
Haggan, V. and
Ozaki, T.
(1981), “Modelling nonlinear random
vibrations using an amplitude-dependent autoregressive time series
model”, Bio-metrika,
68, pp.
189–196.Google Scholar
Henry, O. and
Olekalns, N.
(2002), “Does the Australian dollar real
exchange rate display mean reversion ?”, Journal
of International Money and Finance, 21, pp.
651–66.Google Scholar
Kilian, L. and
Taylor, M.
(2003), “Why is it so difficult to beat the
random walk forecast of exchange rates ?”,
Journal of International Economics, 60,
pp. 85–107.Google Scholar
Krugman, P.
(1991), “Target zones and exchange rate
dynamics”, Quarterly Journal of
Economics, 106, pp.
669–682.Google Scholar
Kwiatkowski, D.P.
Phillips, P.
Schmidt, and Shin, Y.,
(1992), “Testing the null hypothesis of
stationarity against the alternative of a unit root. How sure are we that
economic time series have a unit root ?”, Journal
of Econometrics, 54, pp.
159–178.Google Scholar
MacDonald, R.
(1995), “Long-run exchange rate modeling:A
survey of the recent evidence”, International
Monetary Fund Staff Papers, 42, pp.
437–489.Google Scholar
MacDonald, R.
(1999), “What do we really know about real
exchange rates?”, in MacDonald, R. and
Stein, J. (eds),
Equilibrium exchange rates,
Amsterdam,
Kluwer.Google Scholar
MacKinnon, J. and
White, H.
(1985), “Some heteroskedasticity-consistent
covariance matrix estimators with improved finite sample
properties”, Journal of Econometrics,
29, pp.
305–325.Google Scholar
Mark, N.
(1999), “Fundamentals of the real
dollar-pound rate 1871–1994”, in MacDonald, R. and
Stein, J. (eds),
Equilibrium exchange rates,
Amsterdam,
Kluwer.Google Scholar
Meese, R. and
Rogoff, K.
(1988), “Was it real? The exchange
rate-interest differential relation over the modern floating-rate
period”, The Journal of Finance,
43, pp.
933–948.Google Scholar
Michael, P., Nobay, A. and
Peel, D.
(1997), “Transactions costs and nonlinear
adjustment in real exchange rates : an empirical
investigation”, Journal of Political
Economy, 105, pp.
862–879.Google Scholar
Obstfeld, M. and
Taylor, A.
(1997), “Nonlinear aspects of goods-market
arbitrage and adjustment : Heckscher’s commodity points
revisited, Journal of the Japanese and
International Economies, 11, pp.
441–479.Google Scholar
Officer, L.
(1976), “The purchasing power parity theory
of exchange rates : a review article”, IMF Staff
Papers, 23, pp.
1–60.Google Scholar
Phillips, P. and
Perron, P.
(1988), “Testing for unit root in time series
regression”, Biometrika,
75, pp.
335–346.Google Scholar
Pippenger, M. and
Goering
, G. (2000),
“Additional results on the power of unit root and
cointegration tests under threshold process”,
Applied Economics Letters, 7, pp.
641–644.Google Scholar
Rogoff, K.
(1996), “The purchasing power parity
puzzle”, Journal of Economic Literature,
34, pp.
647–668.Google Scholar
Schnatz, B., Vijselaar, F. and
Osbat, C.
(2004), “Productivity and the (‘synthetic’)
Euro-dollar exchange rate”, Review of World
Economics, 140, pp.
1–30.Google Scholar
Sercu, P., Uppal, R. and
Van
Hulle, C.
(1995), “The exchange rate in the presence of
transaction costs : implications for tests of purchasing power
parity”, The Journal of Finance,
50, pp.
1309–1319.Google Scholar
Shin, D. and Lee, O.
(2001), “Tests for asymmetry in possibly
nonstationary time series data”, Journal of
Business and Economic Statistics, 19, pp.
233–244.Google Scholar
St-Amant, P.
(1996), “Decomposing U.S. nominal interest
rates into expected inflation and ex ante real interest rates using
structural VAR methodology”, Working Paper n°
96–2, Bank of Canada,
Ottawa.Google Scholar
Taylor, A.
(2001), “Potential pitfalls for the PPP
puzzle ? Sampling and specification biases in mean-reversion tests of the
LOOP”, Econornetrica,
69, pp.
473–498.Google Scholar
Throop, A.
(1994), “A generalised uncovered interest
rate parity model of real exchange rates”,
Manuscript, Federal Reserve Bank of San
Fransisco, San
Fransisco.Google Scholar
Tsay, R.
(1998), “Testing and modeling multivariate
threshold models”, Journal of the American
Statistical Association, 93, pp.
1188–1202.Google Scholar
Uppal, R.
(1993), “A general equilibrium model of
international portfolio choice”, The Journal of
Finance, 48, pp.
529–553.Google Scholar