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Non-Linear Adjustment Process In Won/Dollar And Won/Yen Real Exchage Rates

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  • Kyttack Hong

    ()
    (Department of Economics, Chung-Ang University)

  • Dong-Hwan Oh

    (Department of Economics, Chung-Ang University)

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    Abstract

    We examine the purchasing power parity (PPP) hypothesis in won/dollar and won/yen real exchange rates using a non-linear framework. Many empirical studies based on the linear framework have failed to find clear supporting evidence for the validity of PPP hypothesis. We test the PPP hypothesis using a two-stage procedure suggested by Engle and Granger (1987), and show that it fails to reject non-cointegration. Evaluating the linear model against the nonlinear STAR model, we find that linearity is clearly rejected, but ESTAR process is accepted. Moreover, the parameter estimates of the ESTAR model establish a certain pattern of random walk behavior for small deviations and of fast adjustment for large deviations, thus providing strong evidence for mean-reverting behavior in real won/dollar and won/yen exchange rates.

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    File URL: http://www.jed.or.kr/full-text/34-2/6.pdf
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    Bibliographic Info

    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 34 (2009)
    Issue (Month): 2 (December)
    Pages: 111-130

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    Handle: RePEc:jed:journl:v:34:y:2009:i:2:p:111-130

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    Related research

    Keywords: Purchasing Power Parity; Non-linear Adjustment Process; ESTAR Model;

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    References

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    1. Kilian, Lutz & Taylor, Mark P., 2001. "Why is it so difficult to beat the random walk forecast of exchange rates?," Working Paper Series 0088, European Central Bank.
    2. Mohammad Hasan, 2006. "A century of Purchasing Power Parity: evidence from Canada and Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 145-156.
    3. Michael Sager, 2006. "Explaining the persistence of deviations from PPP: a non-linear Harrod-Balassa-Samuelson effect?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 41-61.
    4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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