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Nonlinearities in the Real Exchange Rates: New Evidence from Developed and Developing Countries

Yamin Ahmad, Ming Lo () and Olena Staveley-O'Carroll ()
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Ming Lo: Metropolitan State University

No 1813, Working Papers from College of the Holy Cross, Department of Economics

Abstract: This paper investigates nonlinearities in the dynamics of real exchange rates. We use Monte Carlo simulations to establish the size properties of the Ter�svirta-Anderson (1992) and the Ter�svirta (1994) test, when the dynamics of the real exchange rate is infl?uenced by an exogenous process. In addition, we examine the modifi?cation proposed by Ahmad, Lo and Mykhaylova (2013; Journal of International Economics) to show that the modifi?ed nonlinearity test performs much better than the original in both Monte Carlo exercises and in the actual data on 1431 bilateral real exchange rate series. Finally, we investigate the dynamics of the real exchange rate for both developed and developing countries using the modifi?ed test for the recent ?floating period. In general, the results fi?nds a greater incidence of nonlinear dynamics for developing country real exchange rates.

Keywords: real exchange rate dynamics; nonlinear dynamics; smooth transition estimation; Monte Carlo analysis (search for similar items in EconPapers)
JEL-codes: F41 F47 C15 C32 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2018-12
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Published in Applied Economics, forthcoming.

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http://web.holycross.edu/RePEc/hcx/HC1813-StavleyOCarroll_ExchangeRates.pdf (application/pdf)

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