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Japan-U.S. Real Exchange Rate Behaviour: Evidence from Linear and Non-Linear Endogenous Break Tests

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Author Info

  • Chan Tze-Haw

    ()
    (Finance Section, School of Management, Universiti Sains Malaysia, 11800, Pulau Pinang, Malaysia)

  • Chong Lee-Lee

    (Finance and Economics Department, Faculty of Management, Multimedia University, Jalan Multimedia, 63100, Cyberjaya, Selangor, Malaysia)

  • Hooy Chee-Wooi

    (Finance Section, School of Management, Universiti Sains Malaysia, 11800, Pulau Pinang, Malaysia)

Abstract

This paper explores the mean reversion behaviour of three Japanese real exchange rates during January 1980–January 2010. The CPI- and PPI-based real yen/USD rates and real effective yen rates are examined using newly improved unit root tests allowing for endogenous break(s) in the linear and non-linear manner. We identify structural breaks in 1985 and 1997/98, respectively, via the linear tests from Zivot and Andrews (1992) and Lumsdaine and Papell (1997), but the results were mostly against the PPP hypothesis. The test from Saikkonen and Lütkepohl (2002), however, provides sufficient support for the non-linear adjustment of real exchange rates towards long-run PPP (purchasing power parity), which suggests the goods market integration between the two nations. The exchange rate misalignment is somewhat less evident after the Plaza Accord 1985, and stronger evidence for PPP is found in the post-1999 period. This is supported by a smaller persistency of real exchange (half-life

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Bibliographic Info

Article provided by Penerbit Universiti Sains Malaysia in its journal Asian Academy of Management Journal of Accounting and Finance.

Volume (Year): 7 (2011)
Issue (Month): 1 ()
Pages: 95-109

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Handle: RePEc:usm:journl:aamjaf00701_95-109

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Web page: http://web.usm.my/aamj/
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Related research

Keywords: Real exchange rates; endogenous breaks; non-linearity; half-life;

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Cited by:
  1. Chan, Tze-Haw, 2012. "Assessing the international parity conditions and transmission mechanism for Malaysia-China," MPRA Paper 38930, University Library of Munich, Germany.
  2. Chan, Tze-Haw & Baharumshah, Ahmad Zubaidi, 2012. "Financial Integration between China and Asia Pacific Trading Partners: Parities Evidence from the First- and Second-generation Panel Tests," MPRA Paper 37801, University Library of Munich, Germany.

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