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.
- Exchange rates
MA, Y., & KANAS, A. (2000). Testing for a nonlinear relationship among fundamentals and exchange rates in the ERM. Journal of International Money and Finance, 19(1), 135-152. https://doi.org/10.1016/S0261-5606(99)00045-5