CEPII, Recherche et Expertise sur l'economie mondiale
Nonlinear Adjustment of the Real Exchange Rate Towards its Equilibrium Value: a Panel Smooth Transition Error Correction Modelling

Sophie Béreau
Antonia Lopez Villavicencio
Valérie Mignon

 Highlights :

 Abstract :
 We study the nonlinear dynamics of the real exchange rate towards its behavioral equilibrium value (BEER) using a Panel Smooth Transition Regression model framework.We show that the real exchange rate convergence process in the long run is characterized by nonlinearities for emerging economies, whereas industrialized countries exhibit a linear pattern. Moreover, there exists an asymmetric behavior of the real exchange rate when facing an over- or an undervaluation of the domestic currency. Finally, our results suggest that the real exchange rate is unable to unwind alone global imbalances.

 Keywords : Equilibrium exchange rate | BEER model | Panel smooth transition regression | Panel vector error correction model

 JEL : F31, C23
CEPII Working Paper
N°2008-23, October 2008

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 Fields of expertise

Money & Finance