Large Data Sets, Nonlinearity and the Speed of Adjustment to Real Exchange Rate Shocks

Hyeyoen Kim (1)

1 economics dept

A well known puzzle in international finance concerns the observed very slow speeds of adjustment of real exchange rates in response to shocks. In this paper, we explore whether allowing for a wide range of influences on the real exchange rate in a nonlinear framework can help resolve this puzzle. Using recently proposed econometric methods for summarising very large macroeconomic data sets into a small number of observable factors, we find that there is a long-run relationship between these factors and real exchange rates. When put into a nonlinear framework, we find that allowing for the effects of macroeconomic factors dramatically increases the measured speed of adjustment of the real exchange rate.

Mots clés: Social Sciences & Humanities

Domaines: Économie et finance quantitative [q-fin]

Hyeyoen Kim. Large Data Sets, Nonlinearity and the Speed of Adjustment to Real Exchange Rate Shocks. Applied Economics, 2011, pp.1. ⟨10.1080/00036846.2010.513676⟩. ⟨hal-00665456⟩