The adjustment of the exchange rate towards its long-run equilibrium value: a non-linear cointegration perspective.

Summary Our thesis is a contribution to a growing literature on the nonlinear adjustment of the nominal exchange rate to its long-run equilibrium value. The aim is to model the adjustment of the exchange rate using the non-linear cointegration approach. The thesis is composed of four chapters. In the first chapter, we discuss the shortcomings of linear models to describe the evolution of exchange rates and we explain why we use non-linear models to characterize the adjustment of the exchange rate. In the second chapter, we seek to characterize the adjustment of the exchange rate towards its long-run equilibrium value defined by purchasing power parity using an exponential smooth transition threshold autoregressive specification (ESTAR). The third chapter aims at specifying the adjustment of the exchange rate towards its fundamental value within the framework of the European exchange rate mechanism. We therefore propose an application of an exchange rate determination model on the French franc and the Italian lira: an extension of the standard Krugman target zone model with price rigidity. We consider an original methodology, the threshold cointegration. In chapter four, we examine the dollar-pound adjustment of a monetary model of exchange rate determination. We consider a non-linear cointegration approach using the mixing condition. We compare three types of nonlinear adjustment. The first two specifications are based on cubic functions and rational functions and the third specification considers the ESTAR model.