Equilibrium exchange rate determination and multiple structural changes

Mario Cerrato, Hyunsok Kim and Ronald MacDonald

Journal of Empirical Finance, 2013, vol. 22, issue C, 52-66

Abstract: The large appreciation and depreciation of the US Dollar in the 1980s stimulated an important debate on the usefulness of unit root tests in the presence of structural breaks. In this paper, we propose a simple model to describe the evolution of the real exchange rate. We then propose a more general smooth transition (STR) function than has hitherto been employed, which is able to capture structural changes along the (long-run) equilibrium path, and show that this is consistent with our economic model. Our framework allows for a gradual adjustment between regimes and allows for under- and/or over-valued exchange rate adjustments. Using monthly and quarterly data for up to twenty OECD countries, we apply our methodology to investigate the univariate time series properties of CPI-based real exchange rates with both the U.S. Dollar and German Mark as the numeraire currencies. The empirical results show that, for more than half of the quarterly series, the evidence in favor of the stationarity of the real exchange rate was clearer in the sub-sample period post-1980.

Keywords: Unit root tests; Structural breaks; Purchasing power parity (search for similar items in EconPapers)
JEL-codes: C16 C22 F31 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Equilibrium Exchange Rate Determination and Multiple Structural Changes (2010)
Working Paper: Equilibrium exchange rate determination and multiple structural changes (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:22:y:2013:i:c:p:52-66

DOI: 10.1016/j.jempfin.2013.03.001

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