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  • PavlidisPP_AcceptedMD

    Rights statement: 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.

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A nonlinear analysis of the real exchange rate-consumption relationship

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>10/2018
<mark>Journal</mark>Macroeconomic Dynamics
Issue number7
Volume22
Number of pages19
Pages (from-to)1825-1843
Publication statusPublished
Early online date11/07/17
Original languageEnglish

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.

Bibliographic note

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.