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Modelling Ireland’s exchange rates: from EMS to EMU

Derek Bond (), Michael J. Harrison and Edward O'Brien

No 200718, Working Papers from School of Economics, University College Dublin

Abstract: This paper attempts to model the nominal and real exchange rate for Ireland, relative to Germany and the UK from 1975 to 2003. It offers an overview of the theory of purchasing power parity (Ppp), focusing particularly on likely sources of nonlinearity. Potential difficulties in placing the analysis in the standard I(1)/I(0) framework are highlighted and comparisons with previous Irish studies are made. Tests for fractional integration and nonlinearity, including random field regressions, are discussed and applied. The results obtained highlight the likely inadequacies of the standard cointegration and Star approaches to modelling, and point instead to multiple structural changes models. Using this approach, both bilateral nominal exchange rates are effectively modelled, and in the case of Ireland and Germany, Ppp is found to be valid not only in the long run, but also in the medium term.

Keywords: Purchasing power parity; Fractional Dickey-Fuller tests; Smooth transition autoregression; Random field regression; Multiple structural changes models; Foreign exchange--Econometric models; Purchasing power parity; Stochastic processes (search for similar items in EconPapers)
JEL-codes: C22 C51 F31 F41 (search for similar items in EconPapers)
Date: 2007-11
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Citations: View citations in EconPapers (2) Track citations by RSS feed

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http://hdl.handle.net/10197/1303 First version, 2007 (application/pdf)

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