Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates

Abstract

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Smooth breaks and non-linear mean reversion: Post-Bretton Woods real exchange rates

“…The initial evidence pointed towards the importance of these nonlinearities, but formal tests of unit roots against the alternative of nonlinear mean reversion were developed later. Sollis et al (2002) develop a formal test and find support for PPP in 6 out of 17 countries using post-1972 monthly RER data against the US-dollar. This evidence appears stronger for European countries against the DM, where they reject the unit root null in 8 out of 14 cases.…”

Equilibrium exchange rate determination and multiple structural changes

“…Thus, with the ESTR function, the structural change is an inner regime. The asymmetric ESTR suggested by Sollis et al (2002) has similar properties as the ESTR but it allows asymmetric scale parameters, 1 and 2 where I t = 1 if (t cT ) 0 and 0 otherwise. The transition function S t ( ) is also bounded from 0 to 1 when the 1 and 2 are su¢ ciently large values and if 1 6 = 2 the speed of transition is asymmetric either side of the mid-point cT:…”

Digging out the PPP hypothesis: an integrated empirical coverage

“…Even when supportive evidence for a stable RER could be found, the rate of convergence to the long-run equilibrium was usually surprisingly low (Rogoff 1996). This high degree of persistence in RERs has only been considered as satisfactorily addressed when some authors (e.g., Goldberg et al 1997;Michael et al 1997;Sarantis 1999;Taylor and Peel 2000;Taylor et al 2001;Sollis et al 2002;Liew et al 2003;Liew 2004) started to bring nonlinear adjustments to PPP. In general, all these studies show that RERs are characterized by strong nonlinearities, and conclude that economic forces driving mean-reversion are stronger the farther the RER is from its long-run equilibrium value.…”