Date of This Version
real exchange rate dynamics, nonlinear dynamics, smooth transition estimation, Monte Carlo analysis
F41, F47, C15, C32
This paper investigates nonlinearities in the dynamics of real exchange rates. We use Monte Carlo simulations to establish the size properties of the Teräsvirta-Anderson (1992) and the Teräsvirta (1994) test, when the dynamics of the real exchange rate is influenced by an exogenous process. In addition, we examine the modification proposed by Ahmad, Lo and Mykhaylova (2013; Journal of International Economics) to show that the modified nonlinearity test performs much better than the original in both Monte Carlo exercises and in the actual data on 1431 bilateral real exchange rate series. Finally, we investigate the dynamics of the real exchange rate for both developed and developing countries using the modified test for the recent floating period. In general, the results finds a greater incidence of nonlinear dynamics for developing country real exchange rates.
Working Paper Number
Ahmad, Yamin S.; Lo, Ming Chien; and Staveley-O'Carroll, Olena M., "Nonlinearities in the Real Exchange Rates: New Evidence from Developed and Developing Countries" (2018). Economics Department Working Papers. Paper 174.