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

Frédérique Bec, Melika Ben Salem and Marine Carrasco

CIRANO Working Papers from CIRANO

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 treefold. 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 dynmaics. 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 a 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. Des études récentes sur les modèles d'équilibre général prenant en considération les coûts des transactions démontrent que la dynamique du taux de change réel est nécessairement non linéaire. Notre contribution à la littérature portant sur les mécanismes d'ajustement non linéaire des prix comporte trois volets. Premièrement, nous modélisons le taux de change réel en recourant à une autorégression de type MR-LSTAR (Multi-Regime Logistic Smooth Transition AutoRegression), qui permet d'observer la dynamique des modèles ESTAR (Exponential Smooth TAR) et SETAR (Self-Exciting Treshold Autoregressive). Notre choix est motivé par le fait que même les modèles théoriques, qui prédisent un comportement lisse du taux de change réel, n'excluent pas la possibilité d'un ajustement discontinu à la limite. Deuxièmement, nous proposons deux catégories de tests de racine unitaire, dans le cadre de l'option MR-LSTAR, fondées respectivement sur la vraisemblance et sur un modèle auxiliaire. Leurs distributions asymptotiques résultent d'un processus analytique. Troisièmement, lorsque nos tests sont appliqués à 28 taux de change réels bilatéraux, ils rejettent l'hypothèse nulle d'une racine unitaire dans le cas de onze séries, faisant ainsi la preuve de la parité du pouvoir d'achat.

Keywords: Half-life; purchasing power parity; mixing conditions; smooth transition autoregressive model; unit-root test; real exchange rate; Demi-vie; parité du pouvoir d'achat; conditions de mélange; modèle autorégressif à transition lisse; test d'unité racinaire; taux de change réel (search for similar items in EconPapers)
JEL-codes: C12 C22 F31 (search for similar items in EconPapers)
Date: 2009-05-01
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://cirano.qc.ca/files/publications/2009s-18.pdf

Related works:
Journal Article: Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime star Model (2010)
Working Paper: Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model (2010)
Working Paper: Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2009s-18

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