Nonlinear adjustment in the real dollar-euro exchange rate: The role of the productivity differential as a fundamental

In this paper we analyze the influence of productivity differentials in the dynamics of the real dollar-euro exchange rate. Using nonlinear procedures for the estimation and testing of ESTAR models during the period 1970-2009 we find that the dollar-euro real exchange rate shows nonlinear mean reversion towards the fundamentals represented by the productivity differential. In addition, we provide evidence about the ability of this variable to capture the overvaluation and undervaluation of the dollar against the euro.