Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates

Gene Leon and Serineh Najarian

No 2003/159, IMF Working Papers from International Monetary Fund

Abstract: This paper examines whether deviations from PPP are stationary in the presence of nonlinearity, and whether the adjustment toward PPP is symmetric from above and below. Using alternative nonlinear models, our results support mean reversion and asymmetric adjustment dynamics. We find differences in magnitudes, frequencies, and durations of the deviations of exchange rates from fixed and time-varying thresholds, both between over-appreciations and over-depreciations and between developed and developing countries. In particular, the average cumulative sum of deviations during periods when exchange rates are below forecasts is twice that of the sum during periods of over-appreciation, and is larger for developing than for advanced countries.

Keywords: WP; exchange rate; Nonlinearities; real exchange rates; asymmetry; transition function; WH country; Markov chain; time series; TAR model; advanced country; Purchasing power parity; Exchange rate adjustments; Depreciation; Exchange rates; Asia and Pacific; Western Hemisphere (search for similar items in EconPapers)
Pages: 48
Date: 2003-07-01
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Citations: View citations in EconPapers (4)

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