Testing for a nonlinear relationship among fundamentals and exchange rates in the ERM

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

50 Scopus Citations
View graph of relations

Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)135-152
Journal / PublicationJournal of International Money and Finance
Volume19
Issue number1
Publication statusPublished - Feb 2000
Externally publishedYes

Abstract

We employ two nonparametric nonlinear testing methodologies, namely a nonparametric nonlinear cointegration approach and a nonlinear Granger causality approach, to test for a nonlinear relationship between macroeconomic fundamentals and exchange rates for two country-pairs, namely the Netherlands-Germany and France-Germany. The results suggest that there is nonlinear cointegration among money, output and exchange rates for Netherlands-Germany, which can be interpreted as evidence of a long-run nonlinear relationship. For France-Germany, we fail to find evidence of nonlinear cointegration, but we find nonlinear Granger causality from French money to the FFr/DM exchange rate. These findings may be interpreted as evidence of a dynamic nonlinear relationship and are consistent with the German dominance hypothesis. On the basis of estimated fractional ARIMA models, we rejected the hypothesis that these nonlinearities are due to bubbles. © 2000 Elsevier Science Ltd. All rights reserved.

Research Area(s)

  • Causality, Cointegration, Exchange rates, Nonlinearity