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Asymmetric adjustment and nonlinear dynamics in real exchange rates

✍ Scribed by Hyginus Leon; Serineh Najarian

Publisher: John Wiley and Sons
Year: 2005
Tongue: English
Weight: 235 KB
Volume: 10
Category: Article
ISSN: 1076-9307
DOI: 10.1002/ijfe.257

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✦ Synopsis

This paper examines whether deviations from PPP are stationary in the presence of nonlinearity, and whether the adjustment towards PPP is symmetric from above and below. Using alternative nonlinear models, our results support mean reversion and asymmetric adjustment dynamics. We find differences in magnitudes, frequencies and durations of the deviations of exchange rates from fixed and time-varying thresholds, both between over-appreciations and overdepreciations and between developed and developing countries. In particular, the average cumulative sum of deviations during periods when exchange rates are below forecasts is twice that during periods of over-appreciation and larger for developing than advanced countries.

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