Advanced Search
MyIDEAS: Login to save this paper or follow this series

Real Exchange Rate Behavior: New Evidence with Linear and Non-linear Endogenous Break(s)

Contents:

Author Info

  • Chan, Tze-Haw
  • Chong, Lee Lee
  • Khong, Wye Leong Roy

Abstract

Using 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 Info

If 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.
File URL: http://mpra.ub.uni-muenchen.de/3406/
File Function: original version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3406.

as in new window
Length:
Date of creation: 28 Apr 2008
Date of revision:
Handle: RePEc:pra:mprapa:3406

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords: Real Exchange Rates; Endogenous Breaks; Non-linearity; Half-life;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. repec:fth:oxesaf:97-16 is not listed on IDEAS
  2. 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.
  3. 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.
  4. Lucrezia Reichlin & Peter Rappoport, 1989. "Segmented trends and non-stationary time series," ULB Institutional Repository 2013/10169, ULB -- Universite Libre de Bruxelles.
  5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. Chinn, Menzie D., 2000. "Before the fall: were East Asian currencies overvalued?," Emerging Markets Review, Elsevier, Elsevier, vol. 1(2), pages 101-126, September.
  15. 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.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. 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.
  21. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
  22. 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.
  23. 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.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. 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.
  2. Chan, Tze-Haw, 2012. "Assessing the international parity conditions and transmission mechanism for Malaysia-China," MPRA Paper 38930, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:3406. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.