Nonlinear dynamics in exchange rate deviations from the monetary fundamentals: An empirical study

Bong-Han Kim, Hong-Ghi Min and Young-Kyu Moh

Economic Modelling, 2010, vol. 27, issue 5, 1167-1177

Abstract: This paper reexamines empirical performance of the monetary exchange rate model with nonlinear dynamics of exchange rate deviation from the monetary fundamentals. First, we apply unit root test of Park and Shintani (2005) to post-Bretton Woods exchange rate data and able to reject the null of unit root deviation from monetary fundamentals against alternative hypothesis of nonlinear stationary process for deutschemark, pound, and Swiss franc. Our empirical results find that exchange rates show high degree of mean-reversion with larger deviation and long periods of overvaluation and undervaluation of dollar. We also find empirical evidence of predictability of the monetary fundamentals at longer horizons.

Keywords: Monetary; exchange; rates; model; Nonlinear; unit; root; test; Nonlinear; mean-reversion (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:27:y:2010:i:5:p:1167-1177

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