Exchange Rate Instability: A Threshold Autoregressive Approach

Abstract

We fit a two‐regime threshold autoregressive model to a trade weighted index of the Australian real exchange rate. We find strong evidence of a threshold in the real exchange rate, with the data being classified into two regimes. The timing of the first regime is consistent with events that would be expected to have led to pressure on the Australian exchange rate. However, there is no evidence to suggest that the Asian economic crisis led to the real exchange rate entering this regime.

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