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Non-linear and non-symmetric exchange-rate adjustment:New evidence from medium- and high-inflation countries

Michael Arghyrou (), Virginie Boinet and Christopher Martin ()

Economics and Finance Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: This paper analyses a model of non-linear exchange rate adjustment that extends the literature by allowing asymmetric responses to over- and under-valuations. Applying the model to Greece and Turkey, we find that adjustment is asymmetric and that exchange rates depend on the sign as well as the magnitude of deviations, being more responsive to over-valuations than under-valuations. Our findings support and extend the argument that non-linear models of exchange rate adjustment can help to overcome anomalies in exchange rate behaviour. They also suggest that exchange rate adjustment is non-linear in economies where fundamentals models work well.

Pages: 30 pages
Date: 2003-07
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