Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion
Article first published online: 6 SEP 2010
© 2010 The Ohio State University
Journal of Money, Credit and Banking
Volume 42, Issue 7, pages 1447–1467, October 2010
How to Cite
CERRATO, M., KIM, H. and MACDONALD, R. (2010), Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion. Journal of Money, Credit and Banking, 42: 1447–1467. doi: 10.1111/j.1538-4616.2010.00349.x
- Issue published online: 6 SEP 2010
- Article first published online: 6 SEP 2010
- Received February 4, 2009; and accepted in revised form February 23, 2010.
- unit root tests;
- threshold autoregressive models;
- purchasing power parity
The breakdown of the Bretton Woods system and the adoption of generalized floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility leads economists to search for economic models able to describe observed exchange rate behavior. In the present paper, we propose more general STAR transition functions that encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data sets: one for developing countries and official nominal exchange rates, the second for emerging market economies using black market exchange rates, and the third for OECD economies.