Nonlinear adjustment of Asian real exchange rates

We utilize nonlinear models to examine the stationarity of Asian real exchange rates over the period from 1980:10 to 2007:09, using the US, Japan, and China as base countries. We find evidence of nonlinearity in most cases. Contrary to widely-held belief that the behavior of the real exchange rate should exhibit symmetrical adjustment for deviations above and below the equilibrium level, we find strong evidence of asymmetrical adjustment for most cases. Applying unit root tests that account for two types of nonlinearities (smooth transition and nonlinear deterministic trends) reveals evidence of stationarity in all but the Philippines vis-à-vis Japan. Further testing shows that the results are robust to different exchange rate regimes and, in the case of Malaysia, robust to the imposition of capital controls after the 1997 Asian crisis. © 2011 Springer Science+Business Media, LLC.