Drifting STAR: A Time-Varying Nonlinear Real Exchange Rate Analysis

Efthymios Pavlidis and Nicos Pavlidis

No 429842484, Working Papers from Lancaster University Management School, Economics Department

Abstract: Nonlinear real exchange rate models are typically based on the assumption of time-invariant market frictions. In this paper, we propose a time-varying-parameter smooth transition autoregressive model that facilitates inference on the evolution of market frictions and real exchange rate volatility. Using a long-span monthly dataset on the dollar–sterling real exchange rate that covers more than two centuries, we estimate the model in a fully Bayesian framework via Hamiltonian Monte Carlo. Our results provide evidence of long swings in the degree of market frictions over time. Furthermore, we show that real exchange rate volatility has exhibited large and persistent movements. These movements can be partially attributed to changes in the exchange rate regime. Finally, a generalized impulse response analysis indicates that the speed of real exchange rate adjustment to shocks varies substantially across historical periods.

Keywords: Real Exchange Rate; Market Frictions; Time-Varying-Parameter Smooth Transition Autoregressive Model; Stochastic Volatility; Hamiltonian Monte Carlo (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:lan:wpaper:429842484

Access Statistics for this paper

More papers in Working Papers from Lancaster University Management School, Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Giorgio Motta ().