Arbeitspapier
Nonlinearities and Asymmetric Adjustment to PPP in an Exchange Rate Model with Inflation Expectations
This paper estimates a model of the real exchange rate including standard fundamentals as well as two alternative measures of inflation expectations for five inflation targeting countries (UK, Canada, Australia, New Zealand, Sweden) over the period January 1993-July 2019. Both a benchmark linear ARDL model and a nonlinear ARDL (NARDL) specification are considered. The results suggest that the nonlinear framework is more appropriate to capture the behaviour of real exchange rates given the presence of asymmetries both in the long- and short-run. In particular, the speed of adjustment towards the PPP-implied long-run equilibrium is three times faster in a nonlinear framework, which provides much stronger evidence in support of PPP. Moreover, inflation expectations play an important role, with survey-based ones having a more sizable effect than market-based ones. Monetary authorities should aim to achieve a high degree of credibility to manage them and thus currency fluctuations effectively. The inflation targeting framework might be especially appropriate for this purpose.
- Language
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Englisch
- Bibliographic citation
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Series: CESifo Working Paper ; No. 8921
- Classification
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Wirtschaft
Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Foreign Exchange
International Financial Markets
- Subject
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nonlinearities
asymmetric adjustment
PPP
real exchange rate
inflation expectations
- Event
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Geistige Schöpfung
- (who)
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Anderl, Christina
Caporale, Guglielmo Maria
- Event
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Veröffentlichung
- (who)
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Center for Economic Studies and Ifo Institute (CESifo)
- (where)
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Munich
- (when)
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2021
- Handle
- Last update
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10.03.2025, 11:45 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Anderl, Christina
- Caporale, Guglielmo Maria
- Center for Economic Studies and Ifo Institute (CESifo)
Time of origin
- 2021
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