A Simple Model and Its Application in the Valuation of Five Asian Real Exchange Rates
AbstractIn the current paper, a new and simple currency valuation model called the ratio model is proposed based on the Penn effect (a systematic deviation of the purchasing power parity (PPP)). The ratio model, which reduces the uncertainty of the econometric specification that many other valuation models have, is used to valuate the bilateral real exchange rates (RERs) of five Asian industrial countries and areas, namely, Japan, Korea, Taiwan, Hong Kong, and Singapore, against the United States. In the early 1950s to 2009, the misalignments from the ratio model of four new industrial countries and areas converged, but those from the PPP model did not, implying the competitiveness of the ratio model against the PPP model both in currency valuation and as a RER anchor. In 2010–2011, based on the two models, the yen was overvalued by approximately 30%, whereas the Singapore dollar was undervalued by approximately 20%. However, the conclusions on the other three RERs were not consistent.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 40953.
Date of creation: 28 Aug 2012
Date of revision:
Equilibrium exchange rate; Absolute purchasing power parity; Balassa-Samuelson effect; Penn effect;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-09 (All new papers)
- NEP-OPM-2012-09-09 (Open Economy Macroeconomic)
- NEP-SEA-2012-09-09 (South East Asia)
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