Abstract

This paper tests for nonlinearity in EMS exchange rates using the bispectrum. The early experience of the ERM witnessed numerous realignments. We find that exchange rates follow a linear process over the period 1979-1987, consistent with the predictions of the realignment target zone model, where a stabilizing nonlinearity is absent. But from 1987-1992, no realignments occurred, and many currencies conformed to a nonlinear process, consistent with the credible target zone model where an inherent nonlinearity stabilizes exchange rates. However, the Italian lira and the Irish pound follow a linear process, which suggests that a target zone has not proven effective in stabilizing exchange rates.

Recommended Citation

Jon Vilasuso and Steve Cunningham (1996) "Tests for Nonlinearity in EMS Exchange Rates ", Studies in Nonlinear Dynamics & Econometrics: Vol. 1: No. 3, Article 3.
http://www.bepress.com/snde/vol1/iss3/art3

Related Files

cunningham_datacode.zip (22 kB)
Data & Code