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Real Exchange Rates and Fundamentals in a new Markov‐STAR Model

Author

Listed:
  • Philip Bertram
  • Teresa Flock
  • Jun Ma
  • Philipp Sibbertsen
Abstract
We propose a new nonlinear Markov‐STAR model to capture both the Markov switching and smooth transition dynamics for real exchange rates. We derive stationarity conditions for the model and apply it to the real exchange rates of 17 countries. We relate switching equilibrium rates and volatilities to a set of relevant macroeconomic variables and find, consistent with economic intuitions, that an economy deteriorating relative to the US economy tends to see a significantly increased likelihood of real exchange rate depreciation. Moreover, we document significant connections between rising economic uncertainties and real exchange rate changes as well as exchange rate volatility.

Suggested Citation

  • Philip Bertram & Teresa Flock & Jun Ma & Philipp Sibbertsen, 2022. "Real Exchange Rates and Fundamentals in a new Markov‐STAR Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 356-379, April.
    • Handle: RePEc:bla:obuest:v:84:y:2022:i:2:p:356-379
    DOI: 10.1111/obes.12467
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    References listed on IDEAS

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