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Asymmetry dynamics in real exchange rates: New results on East Asian currencies

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  • Baharumshah, Ahmad Zubaidi
  • Liew, Venus Khim-Sen
  • Chowdhury, Ibrahim

Abstract

This paper provides new evidence on the purchasing power parity (PPP) hypothesis in six East Asian countries. Based on nonlinear unit root tests, we discovered that the results are broadly consistent with the fact that real exchange rates (RERs) follow a nonlinear mean reversion process. We presented new evidence that the adjustment towards the PPP parity is asymmetric (LSTAR process) above and below the equilibrium value in all but one case -- the Malaysian ringgit (MYR). The empirical results suggest that it is important that the conventional tests of PPP be amended to take account of asymmetries in the adjustment process in RERs.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 19 (2010)
Issue (Month): 4 (October)
Pages: 648-661

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Handle: RePEc:eee:reveco:v:19:y:2010:i:4:p:648-661

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Web page: http://www.elsevier.com/locate/inca/620165

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Keywords: Real exchange rate STAR Nonlinear Mean reversion East Asian;

References

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Cited by:
  1. Ahmad Zubaidi Baharumshah & Venus Khim-Sen Liew & Ron Mittelhammer, 2010. "Non-linearities in Real Interest Rate Parity: Evidence from OECD and Asian Developing Economies," Global Economic Review, Taylor & Francis Journals, vol. 39(4), pages 351-364.
  2. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.
  3. Su, Chi-Wei & Tsangyao, Chang & Chang, Hsu-Ling, 2011. "Purchasing power parity for fifteen Latin American countries: Stationary test with a Fourier function," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 839-845, October.

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