Real Exchange Rate Behavior: New Evidence with Linear and Non-linear Endogenous Break(s)
AbstractUsing monthly frequency data from 1981 to 2005, we test for the potential mean reversion of Japan-US real exchange rates using newly improved unit root tests allowing for endogenous (unknown) break(s) in the linear as well as non-linear manner. Both countries have contributed vital proportion in global trading on top of being the major trading partner to each other since 1960s. We identify structural breaks in 1985 and 1994 respectively via the Lumsdaine and Papell (1997)’s linear test, but the results were against the PPP hypothesis. The Saikkonen and LÄutkepohl, (2002)’s test, however, provides sufficient supports for non-linear adjustment of real exchange towards long run PPP. In addition, stronger evidence for PPP is found in the post-1994 period, in conjunction with the small persistence of real exchange deviations (half-life less than a year). Also, the exchange rate misalignment is less evident after the Plaza Accord 1985. In brief, our findings reveal that the Japanese authority has shown some form of PPP-oriented rule as a basis for their exchange rate policies, in the presence of structural break(s) and non-linearity.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 3406.
Date of creation: 28 Apr 2008
Date of revision:
Real Exchange Rates; Endogenous Breaks; Non-linearity; Half-life;
Find related papers by JEL classification:
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-13 (All new papers)
- NEP-CBA-2008-06-13 (Central Banking)
- NEP-FMK-2008-06-13 (Financial Markets)
- NEP-IFN-2008-06-13 (International Finance)
- NEP-OPM-2008-06-13 (Open Economy Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:fth:oxesaf:97-16 is not listed on IDEAS
- Mototsugu Shintani, 2006.
"A nonparametric measure of convergence towards purchasing power parity,"
Journal of Applied Econometrics, John Wiley & Sons, Ltd.,
John Wiley & Sons, Ltd., vol. 21(5), pages 589-604.
- Mototsugu Shintani, 2002. "A Nonparametric Measure of Convergence Toward Purchasing Power Parity," Vanderbilt University Department of Economics Working Papers 0219, Vanderbilt University Department of Economics, revised Jul 2004.
- Mototsugu Shintani, 2003. "A Nonparametric Measure of Convergence Toward Purchasing Power Parity," Levine's Working Paper Archive 506439000000000172, David K. Levine.
- Kenneth A. Froot & Kenneth Rogoff, 1994.
"Perspectives on PPP and Long-Run Real Exchange Rates,"
NBER Working Papers
4952, National Bureau of Economic Research, Inc.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
- Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
- Lucrezia Reichlin & Peter Rappoport, 1989.
"Segmented trends and non-stationary time series,"
ULB Institutional Repository
2013/10169, ULB -- Universite Libre de Bruxelles.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Robin L. Lumsdaine & David H. Papell, 1997.
"Multiple Trend Breaks And The Unit-Root Hypothesis,"
The Review of Economics and Statistics,
MIT Press, vol. 79(2), pages 212-218, May.
- Tom Doan, . "LPUNIT: RATS procedure to implement Lumsdaine-Papell unit root test with structural breaks," Statistical Software Components RTS00110, Boston College Department of Economics.
- Helmut Luetkepohl & Pentti Saikkonen, 2000.
"Testing for a Unit Root in a Time Series with a Level Shift at Unknown Time,"
Econometric Society World Congress 2000 Contributed Papers, Econometric Society
0342, Econometric Society.
- Saikkonen, Pentti & L tkepohl, Helmut, 2002. "Testing For A Unit Root In A Time Series With A Level Shift At Unknown Time," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 18(02), pages 313-348, April.
- Saikkonen, Pentti & Lütkepohl, Helmut, 1999. "Testing for a unit root in a time series with a level shift at unknown time," SFB 373 Discussion Papers 1999,72, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Papell, David H., 2002.
"The great appreciation, the great depreciation, and the purchasing power parity hypothesis,"
Journal of International Economics, Elsevier,
Elsevier, vol. 57(1), pages 51-82, June.
- David Papell, 1998. "The Great Appreciation, the Great Depreciation, and the Purchasing Power Parity Hypothesis," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 30, Oesterreichische Nationalbank (Austrian Central Bank).
- Lanne, Markku & Lütkepohl, Helmut & Saikkonen, Pentti, 2001.
"Test procedures for unit roots in time series with level shifts at unknown time,"
SFB 373 Discussion Papers
2001,39, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Markku Lanne & Helmut Lutkepohl & Pentti Saikkonen, 2003. "Test Procedures for Unit Roots in Time Series with Level Shifts at Unknown Time," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(1), pages 91-115, February.
- Janine Aron & Ibrahim Elbadawi & Brian Kahn, 1998.
"Determinants of the real exchange rate in South Africa,"
CSAE Working Paper Series
1997-16, Centre for the Study of African Economies, University of Oxford.
- Janine Aron & Ibrahim Elbadawi and Brian Kahn, 1997. "Determinants of the real exchange rate in South Africa," Economics Series Working Papers WPS/1997-16, University of Oxford, Department of Economics.
- Mark, Nelson C., 1990. "Real and nominal exchange rates in the long run: An empirical investigation," Journal of International Economics, Elsevier, Elsevier, vol. 28(1-2), pages 115-136, February.
- Venus Khim-sen Liew & Ahmad Zubaidi Baharumshah & Terence Tai-leung Chong, 2003.
"Are Asian Real Exchange Rates Stationary?,"
International Finance, EconWPA
0307002, EconWPA, revised 01 Nov 2004.
- Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, Elsevier, vol. 43(3-4), pages 313-332, November.
- Chinn, Menzie D., 2000.
"Before the fall: were East Asian currencies overvalued?,"
Emerging Markets Review, Elsevier,
Elsevier, vol. 1(2), pages 101-126, September.
- Menzie D. Chinn, 1998. "Before the Fall: Were East Asian Currencies Overvalued?," NBER Working Papers 6491, National Bureau of Economic Research, Inc.
- Aggarwal, Raj & Mougoue, Mbodja, 1996. "Cointegration among Asian currencies: Evidence of the increasing influence of the Japanese yen," Japan and the World Economy, Elsevier, Elsevier, vol. 8(3), pages 291-308, September.
- Wu, Yangru, 1996. "Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(1), pages 54-63, February.
- Ahmad Zubaidi Baharumshah & Raj Aggarwal & Chan Tze Haw, 2007.
"East Asian Real Exchange Rates and PPP: New Evidence from Panel-data Tests,"
Global Economic Review, Taylor & Francis Journals,
Taylor & Francis Journals, vol. 36(2), pages 103-119.
- Baharumshah, Ahmad Zubaidi & Aggarwal, Raj & Chan, Tze-Haw, 2005. "East Asian Real Exchange Rates and PPP: New Evidence from panel-data tests," MPRA Paper 2023, University Library of Munich, Germany, revised 2007.
- Murray, Christian J. & Papell, David H., 2002.
"The purchasing power parity persistence paradigm,"
Journal of International Economics, Elsevier,
Elsevier, vol. 56(1), pages 1-19, January.
- Christian J. Murray & David H. Papell, 2000. "The Purchasing Power Parity Persistence Paradigm," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0017, Econometric Society.
- Bahmani-Oskooee, Mohsen, 1993. "Purchasing power parity based on effective exchange rate and cointegration: 25 LDCs' experience with its absolute formulation," World Development, Elsevier, Elsevier, vol. 21(6), pages 1023-1031, June.
- Hakkio, Craig S., 1984. "A re-examination of purchasing power parity : A multi-country and multi-period study," Journal of International Economics, Elsevier, Elsevier, vol. 17(3-4), pages 265-277, November.
- Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
- Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(6), pages 945-954, December.
- Ben-David, Dan & Lumsdaine, Robin L & Papell, David, 1996. "The Unit Root Hypothesis in Long-term Output: Evidence from Two Structural Breaks for 16 Countries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1336, C.E.P.R. Discussion Papers.
- 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.
- Chan, Tze-Haw, 2012. "Assessing the international parity conditions and transmission mechanism for Malaysia-China," MPRA Paper 38930, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.