Research output: Working paper
Research output: Working paper
}
TY - UNPB
T1 - Smooth transition models and arbitrage consistency
AU - Peel, D
AU - Venetis, I A
PY - 2005
Y1 - 2005
N2 - Slow adjustment of real exchange rate towards its long run equilibrium in linear models has long puzzled researchers and provided the impetus for the adoption of particular classes of nonlinear models. The exponential smooth transition model has been particularly successful as an ex post characterization of time series purchasing power parity data providing faster adjustment speeds. In this paper we discuss some of its theoretical limitations as an ex ante data generating mechanism since one interpretation of it is that expectations are adaptive. We propose a new nonlinear model which is conceptually superior to the ESTAR model since it is consistent with rational expectations. One of the advantages of the model is that it can be solved and estimated by nonlinear least squares. Using monthly post-1973 real exchange rate data, we show that the model implies even faster speeds of adjustment.
AB - Slow adjustment of real exchange rate towards its long run equilibrium in linear models has long puzzled researchers and provided the impetus for the adoption of particular classes of nonlinear models. The exponential smooth transition model has been particularly successful as an ex post characterization of time series purchasing power parity data providing faster adjustment speeds. In this paper we discuss some of its theoretical limitations as an ex ante data generating mechanism since one interpretation of it is that expectations are adaptive. We propose a new nonlinear model which is conceptually superior to the ESTAR model since it is consistent with rational expectations. One of the advantages of the model is that it can be solved and estimated by nonlinear least squares. Using monthly post-1973 real exchange rate data, we show that the model implies even faster speeds of adjustment.
KW - Mean reversion
KW - ESTAR
KW - real exchange rate
KW - purchasing power parity
M3 - Working paper
T3 - Economics Working Paper Series
BT - Smooth transition models and arbitrage consistency
PB - The Department of Economics
CY - Lancaster University
ER -