Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 1999:4: Real Exchange Rates and Switching Regimes

U. Michael Bergman () and Jesper Hansson
Additional contact information
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.

Keywords: Real exchange rates; Markov switching autoregressive models; forecasts; simulation

JEL-codes: C22; C53; F31

21 pages, First version: September 28, 1999. Revised: June 8, 2000. Earlier revisions: June 8, 2000.

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