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

Frédérique Bec, Melika Ben Salem () and Marine Carrasco ()
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Melika Ben Salem: OEP, Universite de Marne-la-Vallee

No 509, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

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 rates 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. (search for similar items in EconPapers)
JEL-codes: C12 C22 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fin and nep-ifn
Date: 2004-09
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Working Paper: Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model (2009)
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