Nonlinear Exchange Rate Models: A Selective Overview

Lucio Sarno

No 2003/111, IMF Working Papers from International Monetary Fund

Abstract: This paper provides a selective overview of nonlinear exchange rate models recently proposed in the literature and assesses their contribution to understanding exchange rate behavior. Two key questions are examined. The first question is whether nonlinear autoregressive models of real exchange rates help resolve the "purchasing power parity (PPP) puzzles." The second question is whether recently developed nonlinear, regime-switching vector equilibrium correction models of the nominal exchange rate can beat a random walk model, the standard benchmark in the exchange rate literature, in terms of out-of-sample forecasting performance. Finally, issues related to the adequateness of standard methods of evaluation of (linear and nonlinear) exchange rate models are discussed with reference to different forecast accuracy criteria.

Keywords: WP; nominal exchange rate; exchange rate; purchasing power parity; forecasting; nonlinearity; mean reversion; financial risk management; movements risk; U.S. dollar; pound sterling; forecasting result; regime-switching vector equilibrium correction model; exchange rate forecasting result; confidence level; exchange rate literature; exchange rate distribution; exchange rate economics; Real exchange rates; Exchange rates; Exchange rate modelling; Exchange rate forecasting; Global (search for similar items in EconPapers)
Pages: 39
Date: 2003-05-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=16541 (application/pdf)

Related works:
Journal Article: Nonlinear Exchange Rate Models: A Selective Overview (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2003/111

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().