Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime Star Model

36 Pages Posted: 17 Jun 2004

See all articles by Frederique Bec

Frederique Bec

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); University of Cergy-Pontoise - THEMA

Melika Ben Salem

Université Paris-Est Marne la Vallée (UPEMLV); Universite Paris Est

Marine Carrasco

University of Montreal - Departement de Ciences Economiques

Date Written: June 2004

Abstract

Recent studies on general equilibrium models with transaction costs show that the dynamics of the real exchange rate are necessarily nonlinear. Our contribution to the literature on nonlinear price adjustment mechanisms is threefold. First, we model the real exchange rate by a Multi-Regime Logistic Smooth Transition AutoRegression (MR-LSTAR), allowing for both ESTAR-type and SETAR-type dynamics. This choice is motivated by the fact that even the theoretical models, which predict a smooth behavior for the real exchange rate, do not rule out the possibility of a discontinuous adjustment as a limit case. Second, we propose two classes of unit-root tests against this MR-LSTAR alternative, based respectively on the likelihood and on an auxiliary model. Their asymptotic distributions are derived analytically. Third, when applied to 28 bilateral real exchange rates, our tests reject the null hypothesis of a unit root for eleven series bringing evidence in favor of the purchasing power parity.

Keywords: Half-life, purchasing power parity, mixing conditions, smooth transition autoregressive model, unit-root test, real exchange rate

JEL Classification: C12, C22, F31

Suggested Citation

Bec, Frederique and Bec, Frederique and Ben Salem, Melika and Carrasco, Marine, Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime Star Model (June 2004). Available at SSRN: https://ssrn.com/abstract=556738 or http://dx.doi.org/10.2139/ssrn.556738

Frederique Bec (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

Melika Ben Salem

Université Paris-Est Marne la Vallée (UPEMLV) ( email )

France

Universite Paris Est ( email )

Batiment Bois de l'Etang
5 rue Galilee
Champs sur Marne, 77420
France

Marine Carrasco

University of Montreal - Departement de Ciences Economiques ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada
(514) 343-2394 (Phone)

HOME PAGE: http://www.sceco.umontreal.ca/liste_personnel/carrasco/index.htm

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