U. Michael Bergman
() and Jesper Hansson
U. Michael Bergman: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Jesper Hansson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
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.
21 pages, First version: September 28, 1999. Revised: June 8, 2000. Earlier revisions: June 8, 2000.
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