✦ LIBER ✦

A non-linear model of the real US/UK exchange rate

✍ Scribed by John Creedy; Jenny Lye; Vance L. Martin

Publisher: John Wiley and Sons
Year: 1996
Tongue: English
Weight: 1018 KB
Volume: 11
Category: Article
ISSN: 0883-7252
DOI: 10.1002/(sici)1099-1255(199611)11:6<669::aid-jae415>3.0.co;2-5

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✦ Synopsis

This paper provides a framework for building and estimating non-linear real exchange rate models. The approach derives the stationary distribution from a continuous time error correction model and estimates this by MLE methods. The derived distribution exhibits a wide variety of distributional shapes including multimodality. The main result is that swings in the US/UK rate over the period 1973:3 to 1990:s can be attributed to the distribution becoming bimodal with the rate switching between equilibria. By capturing these changes in the distribution, the non-linear model yields improvements over the random walk, the speculative efficiency model, and Hamilton's stochastic segmented trends model.

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