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Smooth Breaks and Non-Linear Mean Reversion: Post-Bretton Woods Real Exchange Rates

Christopoulos, Dimitris K, Leon-Ledesma, Miguel A. (2010) Smooth Breaks and Non-Linear Mean Reversion: Post-Bretton Woods Real Exchange Rates. Journal of International Money and Finance, 29 (6). pp. 1076-1093. ISSN 0261-5606. (doi:10.1016/j.jimonfin.2010.02.003) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided) (KAR id:40522)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
Official URL
http://dx.doi.org/10.1016/j.jimonfin.2010.02.003

Abstract

The recent literature on Purchasing Power Parity (PPP) has emphasized the role of two phenomena that may lead to the rejection of the PPP hypothesis: structural breaks and non-linear adjustment induced by transaction costs. These two hypotheses are analyzed separately in the literature. We develop tests for unit roots that account jointly for structural breaks and non-linear adjustment. Structural breaks are modeled by means of a Fourier function that allows for infrequent smooth temporary mean changes and is hence compatible with long-run PPP. Nonlinear adjustment is modeled by means of an ESTAR model. Our tests present good finite sample properties. The tests are applied to a set of 15 OECD countries' RERs and are able to reject the null of a unit root in 14 cases. The breaks are usually associated with the great appreciation and later depreciation of the dollar in the 1980s and the ESTAR adjustment appears to play an important role.

Item Type: Article
DOI/Identification number: 10.1016/j.jimonfin.2010.02.003
Additional information: number of additional authors: 1;
Uncontrolled keywords: Fourier model; ESTAR; Nonlinear adjustment; PPP
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Stewart Brownrigg
Date Deposited: 07 Mar 2014 00:05 UTC
Last Modified: 01 Aug 2019 10:37 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/40522 (The current URI for this page, for reference purposes)
Leon-Ledesma, Miguel A.: https://orcid.org/0000-0002-3558-2990
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