A nonlinear analysis of the real exchange rate-consumption relationship

Pavlidis, Efthymios and Paya, Ivan and Peel, David Alan (2018) A nonlinear analysis of the real exchange rate-consumption relationship. Macroeconomic Dynamics, 22 (7). pp. 1825-1843. ISSN 1365-1005

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Abstract

A variety of international macroeconomic models predict a relationship between the real exchange rate and consumption. The empirical evidence in favor of such a relationship is limited, the so-called Backus and Smith puzzle. In this paper, we extend the analysis to allow for nonlinear dynamics and volatility changes across exchange rate regimes. Our findings suggest that long-run relationships in line with standard international business cycle models do exist for many Organization for Economic Co-operation and Development (OECD) countries. Further, Monte Carlo experiments illustrate that the nonlinear models can generate the Backus and Smith and the exchange rate disconnect puzzles. In this paper, we also contribute to the nonlinear real exchange rate literature by establishing a theoretical relationship between volatility and persistence. In accordance with the theoretical results, our empirical findings suggest that the increase in volatility in the post-Bretton Woods era is associated with relatively fast mean reversion of the real rate toward its equilibrium value.

Item Type:
Journal Article
Journal or Publication Title:
Macroeconomic Dynamics
Additional Information:
https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/nonlinear-analysis-of-the-real-exchange-rateconsumption-relationship/B4BAC8781C7C2AEB992CBEF82502DED2 The final, definitive version of this article has been published in the Journal, Macroeconomic Dynamics, 22 (7), pp 1825-1843 2017, © 2017 Cambridge University Press.
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
80224
Deposited By:
Deposited On:
28 Jun 2016 08:22
Refereed?:
Yes
Published?:
Published
Last Modified:
01 Oct 2020 01:36