Smooth-Transition Error-Correction in Exchange Rates

David Gordon McMillan

    Research output: Contribution to journalArticlepeer-review

    8 Citations (Scopus)


    Recent research has increasingly suggested that exchange rates may be characterized by non-linear behavior. This paper examines whether such non-linear behavior is evident, not in rates themselves, but in the adjustment of rates back to fundamental equilibrium. Thus, we examine whether a series of four spot and forward exchange rates exhibit smooth transition non-linear error-correction dynamic behavior. Our results are supportive of this model, particularly in-sample, and suggest some salient differences in the mean-reverting behavior of spot and forward rates, which may be of use to policy authorities and model builders. However, out-of-sample forecast errors between the two models appear insignificantly different from each other.
    Original languageEnglish
    Pages (from-to)217-232
    JournalNorth American Journal of Economics and Finance
    Issue number2
    Publication statusPublished - Aug 2005


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