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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: bec@ensae.fr
***
Email: melika.bensalem@univ-mlv.fr
****
Email: r.macdonald@socsci.gla.ac.uk
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