Nonlinearities and Asymmetric Adjustment to PPP in an Exchange Rate Model with Inflation Expectations

Arbeitspapier

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.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: CESifo Working Paper ; No. 8921

Klassifikation und Themen

• Klassifikation: 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
• Thema: nonlinearities ; asymmetric adjustment ; PPP ; real exchange rate ; inflation expectations

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Anderl, Christina ; Caporale, Guglielmo Maria
• Ereignis: Veröffentlichung
• (wer): Center for Economic Studies and Ifo Institute (CESifo)
• (wo): Munich
• (wann): 2021

Weitere Informationen

• Handle: http://hdl.handle.net/10419/235291
• Letzte Aktualisierung: 10.03.2025, 11:45 MEZ