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Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion

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Abstract:

The breakdown of the Bretton Woods system and the adoption of generalized floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility leads economists to search for economic models able to describe observed exchange rate behavior. In the present paper, we propose more general STAR transition functions that encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data sets: one for developing countries and official nominal exchange rates, the second for emerging market economies using black market exchange rates, and the third for OECD economies.

Keywords: C16; C22; F31; purchasing power parity; threshold autoregressive models; unit root tests

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1538-4616.2010.00349.x

Affiliations: 1: Mario Cerratois a Senior Lecturer at the Department of Economics, University of Glasgow (:  )., Email: m.cerrato@lbss.gla.ac.uk 2: Hyunsok Kimis a Ph.D. student at the Department of Economics, University of Glasgow (:  )., Email: h.kim.3@research.gla.ac.uk 3: Ronald MacDonaldis the Adam Smith Chair of Political Economy at the Department of Economics, University of Glasgow (:  )., Email: r.macdonald@lbss.gla.ac.uk

Publication date: October 1, 2010

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