Baxter, M., 1988, “Business cycles, Stylized Facts, and the exchange rate regime: Evidence from the United States,” Rochester Center for Economic Research Working Paper, No. 169.
Baxter, M. and A.C. Stockman, 1989, “Business Cycles and the Exchange-Rate Regime: Some International Evidence,” Journal of Monetary Economics, No. 23, pp. 377-400.
Bordo, M.D., and A.J. Schwartz, 1996, “Why Clashes between Internal and External Stability Goals End in Currency Crises, 1797-94,” Open Economies Review, No. 7, pp. 437-68.
Bourdet, Y., 1996, “Exchange Rate Regimes and Import Pricing: The Case of the Swedish Car Market,” Review of Industrial Organization, No. 11, pp. 79-91.
Classen, E.M. and E. Peree, 1988, “Discussion,” In F. Giavazzi, S. Micossi and M. Miller (Ed.), The European Monetary System. (Cambridge, Massachusetts: Cambridge University Press), pp. 206-10.
Cuddington, J.T. and H. Liang, 1997, “Commodity Price Volatility Across Exchange Regimes,” Georgetown Working Paper, (Washington: Georgetown University), pp. 97-17.
Cuddington, J.T. and H. Liang, 1998, “Re-Examining the Purchasing Power Parity Hypothesis over Two Centuries,” Georgetown Working Paper, (Washington: Georgetown University), No. 98-01.
Eichengreen, B., 1988, “Real Exchange Rate Behavior under Alternative International Monetary Regimes: Interwar Evidence,” European Economic Review, No. 32, pp. 363-71.
Eichengreen, B., 1994, “History of the International Monetary System: Implications for Research in International Macroeconomics and Finance,” In F. Ploeg (Ed.), Handbook of International Macroeconomics, (Oxford, United Kingdom; Cambridge, Massachusetts: Blackwell), pp. 153-97
- Search Google Scholar
- Export Citation
)| false Eichengreen, B., 1994, “ History of the International Monetary System: Implications for Research in International Macroeconomics and Finance,” In ( F. Ploeg Ed.), Handbook of International Macroeconomics, ( Oxford, United Kingdom; Cambridge, Massachusetts: Blackwell), pp. 153- 97
Engle, R.F., and T. Bollerslev, 1986, “Modeling the Persistence of Conditional Variances,” Econometric Reviews, No. 5, pp. 1-50.
Flood, R.R., and A. K. Rose, 1995, “Exchange Rates: A Virtual Quest for Fundamentals,” Journal of Monetary Economics, No. 36, pp. 3-37.
Frankel, J.A. and A.K. Rose, 1995, “Empirical Research on Nominal Exchange Rates,” In G. Grossman and K. Rogoff (Ed.), Handbook of International Economics, Vol. III, (New York: Elsevier Science B.V.), pp. 1689-1730.
Frankel, J.A. and A.K. Rose, 1981, “Flexible Exchange Rates, Prices and Role of‘News’: Lessons from the 1970s,” Journal of Political Economy, No. 89, pp. 665-690.
Friedman, M., 1953, “The Case for Flexible Exchange Rates,” in Essays in Positive Economics, (Chicago, Illinois: Chicago University Press), pp. 157-203
Giavazzi, F. and A. Giovannini, 1989, Limiting Exchange Rate Flexibility: The European Monetary System, (Cambridge, Massachusetts: MIT Press).
Goldberg, P.K. and M.M. Knetter, M.M., 1997, “Goods Prices and Exchange Rates: What Have we Learned?” Journal of Economic Literature, No. 35, pp. 1243-72.
Grilli, V. and G. Kaminsky, 1991, “Nominal Exchange Rate Regimes and the Real Exchange Rate: Evidence from the United States and Britain, 1885-86,” Journal of Monetary Economics, No. 27, pp. 191-212.
Hallwood, C.P. and R. MacDonald, 1994, International Money and Finance, (Oxford, United Kingdom and Cambridge, Massachusetts: Blackwell Publishers).
Lastrapes, W.D., 1989, “Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application,” Journal of Money, Credit and Banking, No. 21, pp. 66-77.
Lothian, J. R., and M.P. Taylor, 1996, “Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries,” Journal of Political Economy, No. 104, pp. 488-509.
Lucas, R., 1982, “Interest Rates and Currency Prices in a Two-Country World,” Journal of Monetary Economics, No. 10, pp. 335-60.
MacDonald, R., and M.P. Taylor, 1990, “Exchange Rates, Policy Convergence and the European Monetary System,” Centre for Economic Policy Research Discussion Paper, No. 44, London.
MacKinnon, R.I., 1991, “Critical Values for Cointegration Tests,” In R.F. Engle and C.W.J. Granger (Eds.), Long-run Economic Relationships: Readings in Cointegration: Advanced Texts in Econometrics, (Oxford, New York, Toronto and Melbourne: Oxford University Press), pp. 267-76.
- Search Google Scholar
- Export Citation
)| false MacKinnon, R.I., 1991, “ Critical Values for Cointegration Tests,” In ( R.F. Engleand C.W.J. Granger Eds.), Long-run Economic Relationships: Readings in Cointegration: Advanced Texts in Econometrics, ( Oxford, New York, Toronto and Melbourne: Oxford University Press), pp. 267- 76.
Mussa, M., 1986, “Nominal Exchange Rate Regimes and the Behavior of Real Exchange Rates: Evidence and Implications,” Carnegie-Rochester Conference Series on Public Policy, No. 25, pp. 117-214.
Newey, W.K. and K.D. West, 1987, “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix,” Econometrica, No. 55, pp. 703-8.
Rogers, J.H., 1995, “Real Shocks and Real Exchange Rates in Really Long-Term Data,” International Finance Discussion Papers, Board of Governors of the Federal Reserve System, No. 493.
Sapir A. and K. Sekkat, 1995, “Exchange Rate Regimes and Trade Prices: Does the EMS Matter?” Journal of International Economics, No. 38, pp. 75-94.
Stockman, A., 1983, “Real Exchange Rates under Alternative Nominal Exchange-Rate Systems,” Journal of International Money and Finance, No. 2, pp. 147-66.
Ungerer, H., J.J. Hauvonen and T. Mayer, 1990, “The EMS: Developments and Perspectives,” IMF Occasional Paper, No. 73, (Washington: International Monetary Fund).
The author would like to thank John Cuddington, Susan Collins, Mitch Kaneda, and Peter Wickham for their insightful comments and suggestions.
Cuddington and Liang (1998) show that, contrary to the stationary AR(1) specification chosen by Lothian and Taylor (1996), the dollar-sterling RER during 1791-1990 is better modeled as either a difference stationary process with an MA(5) error, or a trend stationary process with an AR(1) and MA(5) error.
Since ut is shown to be heteroskedastic later in the study, Phillips-Perron unit root test is more appropriate than the augmented Dickey-Fuller test.
Although it is possible that the coefficients for A(L) and B(L) are also regime dependent, the short length of some exchange regime episodes makes it very difficult to test this conjecture. For example, there are only six observations in the 1932-38 fixed exchange rate period. Hence, in the subsequent test, the coefficients for A(L) and B(L) are assumed to be the same across exchange regimes.
The weaker rejection for the franc-sterling RER during the whole sample period may be because of the fact that floating has been much less free in Europe than in other parts of the industrial world after the breakdown of the Bretton Woods system. Analysis in Section VI shows that during the brief period when Britain and France joined the ERM, the volatility of their bilateral RER against the deutsche mark was significantly lower.
Note that vt is not a white noise innovation.
For the RER series of France and Netherlands, when adding the regime shift factor into the conditional variance equation, the GARCH term becomes negative. Although it is not significant, a negative GARCH term can not ensure the conditional and unconditional variances to be positive for all realizations of εt.
The statistic has a chi-square distribution with one degree of freedom under the null hypothesis.
The initial members included Belgium, Denmark, France, Germany, Ireland, Italy, and Netherlands. Britain only joined in October 1990.
Some weaker currencies were allowed to fluctuate within 6 percent of their parity rates.
Shaded areas correspond to the period when the ERM was effective.
Neither the trend nor the constant term is significantly different from zero in the PP regressions. Hence they were excluded in the unit root test specification.