Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates

July 1, 2003

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Format: Chicago

Gene L. Leon, and Serineh Najarian. Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates, (USA: International Monetary Fund, 2003) accessed December 25, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Depreciation, Exchange rate adjustments, Exchange rates, Foreign exchange, National accounts, Purchasing power parity, Real exchange rates

Keywords: Advanced country, Asia and Pacific, Asymmetry, Depreciation, Exchange rate, Exchange rate adjustments, Exchange rates, Markov chain, Nonlinearities, Purchasing power parity, Real exchange rates, TAR model, Time series, Transition function, Western Hemisphere, WH country, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/159
Stock No:

WPIEA1592003
ISBN:

9781451857696
ISSN:

1018-5941

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