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Nonlinear relationship between the real exchange rate and economic fundamentals: Evidence from China and Korea

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  • Tang, Xiaolei
  • Zhou, Jizhong
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    Abstract

    This paper investigates the potential nonlinear relationship between the real exchange rates of two currencies (Chinese Yuan and South Korean Won) and economic fundamentals using quarterly data over the period 1980Q1–2009Q4. We employ the Alternating Conditional Expectation algorithm to test for nonlinearity among the variables of interest. The results show that there does exist a nonlinear cointegrating relationship between the real exchange rates and fundamentals for China and Korea. In contrast with the conventional linear relationship, the elasticity of the real exchange rate with respect to fundamentals varies over time according to the nonlinear relationship.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0261560612000873
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 32 (2013)
    Issue (Month): C ()
    Pages: 304-323

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    Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:304-323

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Equilibrium exchange rate; Alternating Conditional Expectation algorithm; Linear cointegration; Nonlinear cointegration;

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