Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 1999:4:
Real Exchange Rates and Switching Regimes

U. Michael Bergman () and Jesper Hansson

Abstract: We suggest that the real exchange rate between the major currencies in the post-Bretton Woods period can be described by a stationary, two state Markov switching AR(1) model. Based on the forecast performance, both in-sample and out-of-sample, we find that this model out-performs two competing models where the real exchange rate is non-stationary. We also find that the existence of different regimes, as in the Markov switching model, is consistent with the common finding of unit roots in the real exchange rate.

Keywords: Real exchange rates; Markov switching autoregressive models; forecasts; simulation; (follow links to similar papers)

JEL-Codes: C22; C53; F31; (follow links to similar papers)

21 pages, September 28, 1999, Revised June 8, 2000

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