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Exchange rate regime and real exchange rate behavior

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Author Info

  • Hiroyuki Taguchi

    ()
    (Policy Research Institute, Ministry of Finance, Government of Japan)

  • Harutaka Murofushi

    ()
    (Economic and Social Research Institute, Cabinet Office, Government of Japan)

  • Hironao Tsuboue

    ()
    (Economic and Social Research Institute, Cabinet Office, Government of Japan)

Abstract

This paper examines exchange rate regimes from the viewpoint of the validity of purchasing power parity (PPP). Specifically, we analyze real exchange rate behavior under various classifications of exchange rate arrangement through panel unit root tests, and also investigate the adjustment speed of nominal exchange rate and relative prices separately through an error correction framework. Our findings are as follows: First, as a result of the panel unit root tests on real exchange rate behavior, industrial countries under “free float” reveal REER stability even though the test results show weak support for this speculation, while developing countries under “hard peg” definitely represent the REER stability, and have full support from the tests. Second, error correction analysis tells us that in industrial countries under “free float,” the adjustment of nominal exchange rate was faster than that of relative prices, while in developing countries under “hard peg” the adjustment of relative prices is faster that that of the nominal exchange rate. We speculate that industrial countries under free float may render exchange rate movements sensitive to the inflation gap, and that developing countries under “hard peg” may produce nonlinear price adjustments toward the REER long-run equilibrium through an anchor-effect of peg on price stabilization.

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File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I4-P45.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 4 ()
Pages: 2924-2936

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Handle: RePEc:ebl:ecbull:eb-09-00339

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Related research

Keywords: real (effective) exchange rate; exchange rate arrangement; panel unit root tests; error correction analysis; nonlinear price adjustment;

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References

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  1. Kaddour Hadri, 1999. "Testing For Stationarity In Heterogeneous Panel Data," Research Papers 1999_04, University of Liverpool Management School.
  2. Jaroslava Hlouskova & Martin Wagner, 2005. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Diskussionsschriften dp0503, Universitaet Bern, Departement Volkswirtschaft.
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  13. Enders, Walter, 1988. "ARIMA and Cointegration Tests of PPP under Fixed and Flexible Exchange Rate Regimes," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 504-08, August.
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  16. Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000. "On Regional Monetary Arrangements For ASEAN," CEPR Discussion Papers 2411, C.E.P.R. Discussion Papers.
  17. Peter Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries: Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
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Cited by:
  1. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.

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