This paper analyses a model of non-linear exchange rate adjustment that extends the
literature by allowing asymmetric responses to over- and under-valuations. Applying
the model to Greece and Turkey, we find that adjustment is asymmetric and that
exchange rates depend on the sign as well as the magnitude of deviations, being more
responsive to over-valuations than under-valuations. Our findings support and extend
the argument that non-linear models of exchange rate adjustment can help to overcome
anomalies in exchange rate behaviour. They also suggest that exchange rate adjustment
is non-linear in economies where fundamentals models work well
