Testing for a nonlinear relationship among fundamentals and exchange rates in the ERM
Document Type
Journal article
Source Publication
Journal of International Money and Finance
Publication Date
2-1-2000
Volume
19
Issue
1
First Page
135
Last Page
152
Keywords
Causality, Cointegration, Exchange rates, Nonlinearity
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.
DOI
10.1016/S0261-5606(99)00045-5
Print ISSN
02615606
Publisher Statement
Copyright © 2000 Elsevier Science Ltd. All rights reserved. Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English