Nonlinearities and asymmetric adjustment to PPP in an exchange rate model with inflation expectations

Purpose This paper aims to explain real exchange rate fluctuations by means of a model including both standard fundamentals and two alternative measures inflation expectations for five targeting countries (the UK, Canada, Australia, New Zealand Sweden) over the period January 1993–July 2019. Design/methodology/approach Both benchmark linear autoregressive distributed lag (ARDL) nonlinear (NARDL) specification are considered. Findings The results suggest that framework is more appropriate capture behaviour rates given presence asymmetries in long short run. In particular, speed adjustment towards purchasing power parity (PPP) implied long-run equilibrium three times faster framework, which provides much stronger evidence support PPP. Moreover, play an important role, with survey-based ones having sizable effect than market-based ones. Originality/value focus on linearities estimation NARDL model, shown outperform ARDL within sample out sample, contribution existing literature has rarely applied this type framework; choice econometric method also makes policy implications analysis reliable; monetary authorities should aim achieve high degree credibility manage them thus currency effectively; might be especially purpose.