The inadequacy of linear autoregressive model for real exchange rates : empirical evidence from Asian economies

Liew, Venus Khim Sen and Chong, T. T. L. and Lim, Kian Ping (2003) The inadequacy of linear autoregressive model for real exchange rates : empirical evidence from Asian economies. Applied Economics, 35 (12). pp. 1387-1392. ISSN 0003-6846

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Abstract

Utilizing the formal linearity test of Luukkonen, Saikkonen and Terasvirta ( Biometrika , 75 , 491-99, 1998) as diagnostic tool, the empirical finding suggests that the linear autoregressive (AR) model is inadequate in describing the real exchange rates behaviour of 11 Asian economies. It is noted that the conventional battery of diagnostic tests is capable of identifying the inadequacy of the linear model in only three of these series. Moreover, the linearity nature of this behaviour has been formally rejected in favour of the non-linear smooth transition autoregressive (STAR) model. The finding of non-linearity in the data generating process of these real exchange rates warrants that the use of linear framework in empirical modelling and statistical testing procedures in the field of exchange rates may lead to an inappropriate policy conclusions.

Item Type: Article
Uncontrolled Keywords: Purchasing power parity, Nonlinear adjustment, Rate behavior
Subjects: ?? HG3810-4000 ??
Divisions: SCHOOL > Labuan School of International Business and Finance
Depositing User: Unnamed user with email storage.bpmlib@ums.edu.my
Date Deposited: 27 Oct 2011 06:45
Last Modified: 16 Oct 2017 07:52
URI: http://eprints.ums.edu.my/id/eprint/886

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