Testing for linear and nonlinear Granger causality in the real exchange rate–consumption relation

Pavlidis, Efthymios; Paya, Iván; Peel, David

doi:10.1016/j.econlet.2015.04.008

Cited by 11 publications

(6 citation statements)

References 13 publications

(19 reference statements)

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“…A common feature of the empirical IRBC studies to date is the assumption of a linear functional form. In a companion paper [Pavlidis et al (2015)], we provide evidence that cast doubts on the validity of this assumption. By applying both linear and nonlinear Granger causality tests to real exchange rate and consumption series, we show that allowing for nonlinearities results in a substantial increase in the number of rejections of the null hypothesis of no-Granger causality.…”

Section: Introductionmentioning

confidence: 92%

A Nonlinear Analysis of the Real Exchange Rate–consumption Relationship

2017

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A variety of international macroeconomic models predict a relationship between the real exchange rate and consumption. The empirical evidence in favor of such a relationship is limited, the so-called Backus and Smith puzzle. In this paper, we extend the analysis to allow for nonlinear dynamics and volatility changes across exchange rate regimes. Our findings suggest that long-run relationships in line with standard international business cycle models do exist for many Organization for Economic Co-operation and Development (OECD) countries. Further, Monte Carlo experiments illustrate that the nonlinear models can generate the Backus and Smith and the exchange rate disconnect puzzles. In this paper, we also contribute to the nonlinear real exchange rate literature by establishing a theoretical relationship between volatility and persistence. In accordance with the theoretical results, our empirical findings suggest that the increase in volatility in the post-Bretton Woods era is associated with relatively fast mean reversion of the real rate toward its equilibrium value.

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Section: Introductionmentioning

confidence: 92%

A Nonlinear Analysis of the Real Exchange Rate–consumption Relationship

2017

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“…Adewuyi and Akpokodje (2013) also documented that exchange rate volatility on consumption in Africa from 1986 to2011, was significant positive and significant negative for anticipated and unanticipated depreciation, respectively. Pavlidis, Paya and Peel (2015) examined 14 OECD economies in a nonlinear framework, and rejected the null of no Granger causality from real exchange rate to real consumption. Johannes et al (2016) analyzed the effect of parameter by modeling uncertainty upon beliefs of U.S postwar aggregate consumption dynamics, and documents that confounded learning due to realistic high-dimensional learning problems, resulting in huge uncertainty over consumption dynamics that recedes gradually.…”

Section: Review Of Literaturementioning

confidence: 99%

Domestic consumption and uncertainty of exchange rate in a Monetary union: Evidence from the Euro area

Okafor¹,

Lokossou²

2021

EurJ Appl Econ

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The research seeks to uncover how real consumption reacts to real exchange rate uncertainty in the short and long run for the world's largest monetary union the Euro zone. Twelve Euro zone countries were sampled covering the period 1995Q1-2019Q4. Using generalized autoregressive conditional heteroskedasticity (GARCH) and pooled mean group (PMG), the result shows that exchange rate uncertainty significantly dampens long-run consumption while the short-run effect is mixed. In the benchmark model, a negative and significant error correction coefficient was obtained, which allows to argue that i) there is evidence of a return to the long-run equilibrium path for consumption following short run deviations and ii) the speed of adjustment to equilibrium is low, with a coefficient of ~ 4%. This suggests that, in the Euro zone, convergence to long-run equilibrium is slow, as the proportion of disequilibrium corrected in one quarter, following a shock, is about 4%, which implies it would take ~17 quarters for one half of the disequilibrium, or deviations from the long-run consumption path to become corrected.

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“…The current literature in this field has shifted its consideration to investigate the nonlinear association between consumption expenditure and exchange rate. Pavlidis et al (2015) used linear and nonlinear granger-causality tests to investigate the association between consumption and ER in fourteen different OECD countries. The findings of their study are contradictory to the internationally acknowledged model of the business cycle, which envisages the association between HC and ER.…”

Section: Introductionmentioning

confidence: 99%

The Asymmetric Effect of Exchange Rate on the Household Consumption Expenditures

et al. 2023

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Previous literature on the exchange rate and household consumption failed to examine the effect of positive and negative changes in the exchange rate on household consumption expenditures. We extended the available literature by investigating the asymmetric impacts in African emerging economies (AEE). To attain this aim, we utilized the nonlinear ARDL model, which covers both negative and positive shocks in the exchange rate. Our results indicate that movements in the exchange rate have asymmetric impacts on household consumption in all the included emerging economies, excluding Nigeria. Our findings propose recommendations for the policymakers to ensure the alignment of the optimal exchange rate for countries of emerging African economies and propose relevant policies for the countries.JEL Classification: D12, D60, I30How to Cite:Gohar, R., Chang, B. H., Uche, E., & Bhatty, K. (2023). The Asymmetric Effect of Exchange Rate on the Household Consumption Expenditures. Etikonomi, 22(1), 31–44. https://doi.org/10.15408/etk.v22i1.23428.

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Testing for linear and nonlinear Granger causality in the real exchange rate–consumption relation

Abstract: International real business cycle models predict a relationship between real exchange rates and consumption. This prediction is not supported by the empirical literature. In a new approach, we apply nonlinear Granger-causality tests to data for 14 OECD countries.

Cited by 11 publications

References 13 publications

A Nonlinear Analysis of the Real Exchange Rate–consumption Relationship

A Nonlinear Analysis of the Real Exchange Rate–consumption Relationship

Domestic consumption and uncertainty of exchange rate in a Monetary union: Evidence from the Euro area

The Asymmetric Effect of Exchange Rate on the Household Consumption Expenditures

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