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Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates
Author:
Mr. Gene L. Leon
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and
Serineh Najariannull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 159
Language:
English
Publication Date:
01 Jul 2003
DOI:
https://doi.org/10.5089/9781451857696.001
ISBN:
9781451857696
ISSN:
1018-5941
Pages:
48
Keywords:
WP; exchange rate; Nonlinearities; real exchange rates; asymmetry; transition function; WH country; Markov chain; time series; TAR model; advanced country; Purchasing power parity; Exchange rate adjustments; Depreciation; Exchange rates; Asia and Pacific; Western Hemisphere
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2003: Issue 159