Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals

We estimate nonlinear time-series models of the deviations of the dollar-st erling and dollar-mark exchange rates from the level suggested by simple mo netary fundamentals over the recent floating rate period. The estimated par ameters are statistically significant on the basis of empirical significanc e levels generated by Monte Carlo methods and imply nonlinear mean reversio n towards the monetary fundamental equilibrium such that the speed of mean reversion increases with the size of the deviation from equilibrium. The re sults are used to provide an illustration of the overvaluation and underval uation of the dollar against sterling and the mark over the recent float, ( C) 2000 Elsevier Science Ltd. All rights reserved.