Nonlinear Exchange Rate Models: A Selective Overview

Abstract

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMP or IMP policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates?

“…In a recent paper, Steinsson (2008) follows a large literature that models the linear univariate empirical properties of the RER. Other univariate nonlinear time series approaches are reviewed in Sarno (2003). In the multivariate setup, Clarida and Galí (1994) and Faust and Rogers (2003), among many others, have used VAR models to explain the response of exchange rates (both real and nominal) to several shocks.…”

Purchasing Power Parity In Mena Revisited: Empirical Evidence in the Presence of Endogenously Determined Break Points

“…The validity of the PPP has been extensively tested, especially for developed countries and focused on official exchange rates. In general, PPP is a valid long-run equilibrium condition at least in industrialized economies (see the survey of Froot and Rogoff, 1995;Sarno and Taylor, 2002;Sarno 2003). On the other hand, empirical evidence on the validity of long-run PPP for developing countries is rather mixed (see, for example, Telatar and Kazdaglı, 1998;Bahmani-Oskooee and Mirzai, 2000;Luintel, 2000;Basher and Mohsin, 2004).…”

Testing the bounds: Empirical behavior of target zone fundamentals

“…Nonlinearity is of course a key feature in many exchange rates models. Sarno (2003), for example, reviews nonlinear exchange rate models. Transaction costs may cause nonlinearities in real exchange rates (Sercu et al, 1995;Michael et al, 1997;.…”