What do we know about real exchange rate non-linearities?

Robinson Kruse, Michael Frömmel, Lukas Menkhoff and Philipp Sibbertsen

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This research points to the serious problem of potentially misspecified alternative hypotheses when testing for unit roots in real exchange rates. We apply a popular unit root test against nonlinear ESTAR and develop a Markov Switching unit root test. The empirical power of these tests against correctly and misspecified non-linear alternatives is analyzed by means of a Monte Carlo study. The chosen parametrization is obtained by real-life exchange rates. The test against ESTAR has low power against all alternatives whereas the proposed unit root test against a Markov Switching autoregressive model performs clearly better. An empirical application of these tests suggests that real exchange rates may indeed be explained by Markov-Switching dynamics.

Keywords: real exchange rates; unit root test; ESTAR; Markov Switching; PPP (search for similar items in EconPapers)
JEL-codes: C12 C22 F31 (search for similar items in EconPapers)
Pages: 25
Date: 2009-05-28
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: What do we know about real exchange rate nonlinearities? (2012)
Working Paper: What do we know about real exchange rate nonlinearities? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2009-50

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