Nonlinear dynamics in exchange rate deviations from the monetary fundamentals: An empirical study

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This paper reexamines empirical performance of the monetary exchange rate model with nonlinear dynamics of exchange rate deviation from the monetary fundamentals. First, we apply unit root test of Park and Shintani (2005) to post-Bretton Woods exchange rate data and able to reject the null of unit root deviation from monetary fundamentals against alternative hypothesis of nonlinear stationary process for deutschemark, pound, and Swiss franc. Our empirical results find that exchange rates show high degree of mean-reversion with larger deviation and long periods of overvaluation and undervaluation of dollar. We also find empirical evidence of predictability of the monetary fundamentals at longer horizons. (C) 2010 Elsevier B.V. All rights reserved.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2010-09
Language
English
Article Type
Article
Keywords

PURCHASING POWER PARITY; UNIT-ROOT TESTS; ADJUSTMENT; MODELS; PREDICTABILITY; SAMPLE

Citation

ECONOMIC MODELLING, v.27, no.5, pp.1167 - 1177

ISSN
0264-9993
URI
http://hdl.handle.net/10203/25491
Appears in Collection
RIMS Journal Papers
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