Abstract
This paper investigates mean reversion in the deviation of Tunisian real effective exchange rate (REER) from its fundamental value. This paper uses the smooth transition auto-regression (STAR) methodology advocated by Granger and Terasvirta (1993) in order to test whether the Tunisian REER is mean reverting over the period 1990:01 to 2010:01. The empirical results show that data support the hypothesis that deviations can be characterized by asymmetric responses towards appreciation and depreciation with the speed of transition between the expansion and contraction regimes being relatively high. The research results have both methodological and practical originality. On the practical side, the main policy implications the paper puts forward are that foreign exchange market participants should adopt the LSTAR model rather than ESTAR model in their attempt to effectively comprehend the behavior of the exchange rates. On the methodological side, this study makes use of robust test for STAR type nonlinearity. This procedure has been deemed immune against outliers and does not need a priori knowledge regarding their presence and/or timing.
Published Version
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