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Title: A Non-Linear Multivariate Model of the U.K. Real Exchange Rate
Authors: Milas, C
Keywords: Real exchange rate; Traded goods; Smooth Transition Vector Error Correction Model;;Quadratic logistic function
Issue Date: 2001
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 01-07
Abstract: This paper discusses linearity testing for the UK real exchange rate within a multivariate framework. First we estimate a long-run real exchange rate relationship within a system involving real wages, the unemployment rate and the real price of oil. Then we adopt a logistic transition function for the estimated relationship and show that non-linearities in the discrepancy between the real exchange rate and its implied long-run level affect the short-run real exchange rate equation. We also find that when the real exchange rate is undervalued, unemployment falls as firms respond to an improvement in domestic competitiveness by increasing their demand for labour. At the same time, workers respond to the improvement in domestic competitiveness by demanding and getting higher wages. Further, the effect on unemployment and wages is nonlinear.
Appears in Collections:Dept of Economics and Finance Research Papers

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