Nonlinear Exchange Rate Models: A Selective Overview

May 1, 2003

Preview Citation

Format: Chicago

Lucio Sarno. Nonlinear Exchange Rate Models: A Selective Overview, (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 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.

Subject: Exchange rate forecasting, Exchange rate modelling, Exchange rates, Foreign exchange, Purchasing power parity, Real exchange rates

Keywords: Confidence level, Exchange rate, Exchange rate distribution, Exchange rate economics, Exchange rate forecasting, Exchange rate forecasting result, Exchange rate literature, Exchange rate modelling, Exchange rates, Financial risk management, Forecasting, Forecasting result, Global, Mean reversion, Movements risk, Nominal exchange rate, Nonlinearity, Pound sterling, Purchasing power parity, Real exchange rates, Regime-switching vector equilibrium correction model, U.S. dollar, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/111
Stock No:

WPIEA1112003
ISBN:

9781451853490
ISSN:

1018-5941

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