The author is grateful for valuable comments and helpful suggestions from Sanjay Banerji and an anonymous referee.
Nonlinear Exchange Rate Adjustment and the Monetary Model
Version of Record online: 15 AUG 2013
© 2013 John Wiley & Sons Ltd
Review of International Economics
Volume 21, Issue 4, pages 654–670, September 2013
How to Cite
Beckmann, J. (2013), Nonlinear Exchange Rate Adjustment and the Monetary Model. Review of International Economics, 21: 654–670. doi: 10.1111/roie.12062
- Issue online: 15 AUG 2013
- Version of Record online: 15 AUG 2013
Although the empirical literature has delivered evidence in favor of nonlinearities in nominal and real exchange rate adjustment, the corresponding mechanisms with respect to the relationship between nominal exchange rates and fundamentals in general have rarely been put under any close scrutiny. This paper extends the work of other authors, who estimate exponential smooth transition autoregressive models to deviations of the exchange rate from monetary fundamentals. Using monthly data from 1976:01 to 2010:12 for the USA, UK, and Japan, this paper first adopts a cointegrated vector autoregression (VAR) framework to test for the multivariate validity of the monetary model by applying restrictions on the long-run relationships. Then, nonlinear vector error correction models are estimated to tackle the question of whether the adjustment of the nominal exchange rate with respect to those relationships follows a nonlinear path.