A nonlinear adjustment in real exchange rates under transaction costs hypothesis in developed and emerging countries

Ramzi Drissi; Jamel Boukhatem; Ramzi Drissi; Jamel Boukhatem

doi:10.3934/QFE.2020010

Quantitative Finance and Economics

2020, Volume 4, Issue 2: 220-235. doi: 10.3934/QFE.2020010

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Research article

A nonlinear adjustment in real exchange rates under transaction costs hypothesis in developed and emerging countries

Ramzi Drissi ^1,2,
Jamel Boukhatem ^{1,3
,
,}

1.
College of Islamic Economics and Finance, Umm al Qura University, Saudi Arabia
2.
Department of Quantitative Methods, University of Carthage, Carthage, Tunisia
3.
Department of Economics, Faculty of Economic Sciences and Management FSEGT, University of Tunis el Manar, El-Manar 2 City, Tunisia

Received: 08 March 2020 Accepted: 07 April 2020 Published: 09 April 2020
JEL Codes: C22, F31, E32

This paper tries to empirically examine the exchange rate deviations to its level under the purchasing power parity (PPP) and transaction costs hypotheses using a battery of newly developed nonlinear approaches. To explain the persistent differences in exchange rates,we use the half-life function analysis with quarterly data over the period 1988Q1–2018Q2 for a panel of 23 developed and emerging countries. Our results show that some deviations to PPP relation may be governed by non-linear dynamics. The adjustment toward the fundamental equilibrium seems to depend on the size and the sign of the gap from the PPP equilibrium. The foreign exchange rate adjustment can be modeled by symmetric process with the ESTAR model and asymmetric process with LSTAR model.
- real exchange Rates,
- STAR models,
- purchasing power parity,
- nonlinear adjustments
Citation: Ramzi Drissi, Jamel Boukhatem. A nonlinear adjustment in real exchange rates under transaction costs hypothesis in developed and emerging countries[J]. Quantitative Finance and Economics, 2020, 4(2): 220-235. doi: 10.3934/QFE.2020010

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Abstract

This paper tries to empirically examine the exchange rate deviations to its level under the purchasing power parity (PPP) and transaction costs hypotheses using a battery of newly developed nonlinear approaches. To explain the persistent differences in exchange rates,we use the half-life function analysis with quarterly data over the period 1988Q1–2018Q2 for a panel of 23 developed and emerging countries. Our results show that some deviations to PPP relation may be governed by non-linear dynamics. The adjustment toward the fundamental equilibrium seems to depend on the size and the sign of the gap from the PPP equilibrium. The foreign exchange rate adjustment can be modeled by symmetric process with the ESTAR model and asymmetric process with LSTAR model.

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