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Sofiane Hicham Sekioua
''The Nominal Exchange Rate and Monetary Fundamentals: Evidence from Nonlinear Unit Root Tests''
( 2003, Vol. 6 No.1 )
In this paper we model the deviation of the nominal exchange rate from the long run equilibrium level predicted by monetary fundamentals in a nonlinear framework consistent with the presence of transaction costs. In contrast to standard linear methods and studies which test for linearity only, we consider a novel approach that allows for the joint testing of nonlinearity and nonstationarity. Within this approach, we employ nonlinear threshold autoregressive (TAR) unit root tests to investigate whether the deviation of the nominal exchange rate from the level predicted by monetary fundamentals for three major currencies vis-à-vis the US dollar is mean reverting. We are able to reject the null hypotheses of linearity and nonstationarity indicating nonlinear mean reversion of the deviation of the exchange rate from monetary fundamentals. Further, large deviations are found to have faster speed of mean reversion than small deviations.
JEL: F3 - International Finance: General
Manuscript Received : Apr 03 2003 Manuscript Accepted : Apr 03 2003

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