Abstract
We employ two nonparametric nonlinear testing methodologies, namely a nonparametric nonlinear cointegration approach and a nonlinear Granger causality approach, to test for a nonlinear relationship between macroeconomic fundamentals and exchange rates for two country-pairs, namely the Netherlands-Germany and France-Germany. The results suggest that there is nonlinear cointegration among money, output and exchange rates for Netherlands-Germany, which can be interpreted as evidence of a long-run nonlinear relationship. For France-Germany, we fail to find evidence of nonlinear cointegration, but we find nonlinear Granger causality from French money to the FFr/DM exchange rate. These findings may be interpreted as evidence of a dynamic nonlinear relationship and are consistent with the German dominance hypothesis. On the basis of estimated fractional ARIMA models, we rejected the hypothesis that these nonlinearities are due to bubbles.
| Original language | English |
|---|---|
| Pages (from-to) | 135-152 |
| Number of pages | 18 |
| Journal | Journal of International Money and Finance |
| Volume | 19 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 1 Feb 2000 |
Funding
sWe are grateful to an anonymous referee, William Brock and Robert Flood for helpful comments. Appreciations also go to the following people who generously offered their software to us to conduct the research in this paper: Leo Breiman and Jerome Friedman for the ACE Fortran subroutine of nonparametric nonlinear transformation, Herman Bierens for the EasyReg package of nonparametric linear cointegration analysis, Craig Hiemstra for the nonlinear Granger causality tests. However, we are
Keywords
- Causality
- Cointegration
- Exchange rates
- Nonlinearity