Nonlinear Adjustment Towards Purchasing Power Parity
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Questions and Answers

What is the main source of nonlinearity in the adjustment of the nominal exchange rate?

  • The continuous rather than discrete adjustment process as shown in the iceberg model of Dumas (1992).
  • The interaction of heterogeneous agents in the foreign exchange market at the microstructural level. (correct)
  • The tendency for the authorities to intervene in the foreign exchange market.
  • The divergent process when no trade takes place within the transaction costs band.

    • What does the text say about the behavior of the log-level of the real exchange rate near its equilibrium level?

  • It is highly volatile and unpredictable.
  • It is increasingly mean reverting.
  • It follows a random walk process.
  • It is close to a random walk. (correct)

    • What does the text say about the speed of mean reversion of the real exchange rate for larger shocks?

  • The speed of mean reversion is the same for all shock sizes.
  • The speed of mean reversion is faster for larger shocks. (correct)
  • The speed of mean reversion is slower for larger shocks.
  • The speed of mean reversion is unpredictable for larger shocks.

    • What is the range of half-lives of shocks to the real exchange rates near their equilibrium levels according to the text?

    <p>3-5 years</p> Signup and view all the answers

    What is the effect of official intervention in the foreign exchange market on the adjustment of the nominal exchange rate?

    <p>It has a greater impact on short-run exchange rate movements as the nominal exchange rate moves further away from its perceived or actual underlying equilibrium level.</p> Signup and view all the answers

    What are the potential sources of nonlinearities in international goods arbitrage mentioned in the text?

    <p>Transport costs, tariffs, and non-tariff barriers</p> Signup and view all the answers

    What is the implication of assuming instantaneous goods arbitrage at the edges of the band?

    <p>The thresholds become reflecting barriers</p> Signup and view all the answers

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