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On Singaporean Dollar-U.S. Dollar and Purchasing Power Parity

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Author Info
Venus Khim-Sen Liew (Universiti Putra Malaysia)
Ahmad Zubaidi Baharumshah (Universiti Putra Malaysia)
Kian-Ping Lim (Universiti Malaysia Sabah)

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Abstract

This study re-examines the validity of relationship between Singapore Dollar-US Dollar exchange rate and the relative price using the latest econometric methodologies that accounts for non-linearity. Among others, this study finds Exponential Smooth Transition Autoregressive (ESTAR)- type non-linear mean-reverting adjustment process of the nominal Singapore dollar-US dollar rate towards consumer price index ratio. Unlike previous finding of linear cointegration relationship between nominal Singapore Dollar-US Dollar exchange rate and consumer price index ratio, this study shows that the relationship is in fact non- linear in nature. The major economic implications of our findings includes: (1) Policy makers need to take non-linearity into consideration on their policy decision; (2) Monetary Authority of Singapore (MAS) is able to maintain the macroeconomic equilibrium albeit the authority’s strong dollar policy; and (3) One should keep track on Singapore monetary policy and other innovations in aggregate demand in order to closely monitor the movement of Singapore exchange rate.

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Publisher Info
Paper provided by EconWPA in its series International Finance with number 0309001.

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Date of creation: 01 Sep 2003
Date of revision: 01 Nov 2004
Handle: RePEc:wpa:wuwpif:0309001

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Web page: http://129.3.20.41

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Related research
Keywords: Exchange rates; Non-linearity; Purchasing Power Parity; Exponential Smooth Transition Autoregressive (ESTAR); Singapore.;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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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.:
  1. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August. [Downloadable!] (restricted)
    Other versions:
  2. Nguyen, D.T. & Chiang, Y.C., 1989. "Exchange Rate Determination: The Case Of Singapore," Papers 89-1, University of Adelaide - Department of Economics.
  3. Ahmad Zubaidi Baharumshah & Liew Khim Sen & Lim Kian Ping, 2003. "Exchange Rates Forecasting Model: An Alternative Estimation Procedure," International Finance 0307005, EconWPA. [Downloadable!]
  4. Parikh, Ashok & Williams, Geoffrey, 1998. "Modelling Real Exchange Rate Behaviour: A Cross-Country Study," Applied Financial Economics, Taylor and Francis Journals, vol. 8(6), pages 577-87, December. [Downloadable!] (restricted)
  5. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February. [Downloadable!] (restricted)
  6. Ma, Yue & Kanas, Angelos, 2000. "Testing for nonlinear Granger causality from fundamentals to exchange rates in the ERM," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 69-82, January. [Downloadable!] (restricted)
  7. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February. [Downloadable!] (restricted)
  8. Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 2001. "Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 379-399, June. [Downloadable!] (restricted)
    Other versions:
  9. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Venus Khim-Sen Liew & Terence Tai-Leung Chong & Kian-Ping Lim, 2003. "The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies," Applied Economics, Taylor and Francis Journals, vol. 35(12), pages 1387-1392, August. [Downloadable!] (restricted)
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