Exchange rate regime and real exchange rate behavior
This paper examines exchange rate regimes from the viewpoint of the validity of purchasing power parity (PPP). Specifically, we analyze real exchange rate behavior under various classifications of exchange rate arrangement through panel unit root tests, and also investigate the adjustment speed of nominal exchange rate and relative prices separately through an error correction framework. Our findings are as follows: First, as a result of the panel unit root tests on real exchange rate behavior, industrial countries under “free float” reveal REER stability even though the test results show weak support for this speculation, while developing countries under “hard peg” definitely represent the REER stability, and have full support from the tests. Second, error correction analysis tells us that in industrial countries under “free float,” the adjustment of nominal exchange rate was faster than that of relative prices, while in developing countries under “hard peg” the adjustment of relative prices is faster that that of the nominal exchange rate. We speculate that industrial countries under free float may render exchange rate movements sensitive to the inflation gap, and that developing countries under “hard peg” may produce nonlinear price adjustments toward the REER long-run equilibrium through an anchor-effect of peg on price stabilization.
Volume (Year): 29 (2009)
Issue (Month): 4 ()
|Contact details of provider:|| |
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.:
- Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
- Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fear of Floating,"
NBER Working Papers
7993, National Bureau of Economic Research, Inc.
- Ogawa, Eiji & Ito, Takatoshi, 2002.
"On the Desirability of a Regional Basket Currency Arrangement,"
Journal of the Japanese and International Economies,
Elsevier, vol. 16(3), pages 317-334, September.
- Eiji Ogawa & Takatoshi Ito, 2000. "On the Desirability of a Regional Basket Currency Arrangement," NBER Working Papers 8002, National Bureau of Economic Research, Inc.
- Enders, Walter, 1988. "ARIMA and Cointegration Tests of PPP under Fixed and Flexible Exchange Rate Regimes," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 504-08, August.
- Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002.
"Unit root tests in panel data: asymptotic and finite-sample properties,"
Journal of Econometrics,
Elsevier, vol. 108(1), pages 1-24, May.
- Tom Doan, . "LEVINLIN: RATS procedure to perform Levin-Lin-Chu test for unit roots in panel data," Statistical Software Components RTS00242, Boston College Department of Economics.
- Pasaran, M.H. & Im, K.S. & Shin, Y., 1995.
"Testing for Unit Roots in Heterogeneous Panels,"
Cambridge Working Papers in Economics
9526, Faculty of Economics, University of Cambridge.
- Jeffrey A. Frankel, 1985.
"International capital mobility and crowding-out in the U.S. economy: imperfect integration of financial markets or of goods markets?,"
Federal Reserve Bank of St. Louis, pages 33-74.
- Jeffrey A. Frankel, 1985. "International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?," NBER Working Papers 1773, National Bureau of Economic Research, Inc.
- Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
- Parsley, David C & Popper, Helen A, 2001. "Official Exchange Rate Arrangements and Real Exchange Rate Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 976-93, November.
- Peter Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries; Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
- Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000.
"On Regional Monetary Arrangements For ASEAN,"
CEPR Discussion Papers
2411, C.E.P.R. Discussion Papers.
- Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000. "On Regional Monetary Arrangements for ASEAN," Journal of the Japanese and International Economies, Elsevier, vol. 14(2), pages 121-148, June.
- Kawai, Masahiro, 2002. "Exchange Rate Arrangements in East Asia: Lessons from the 1997-98 Currency Crisis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 167-204, December.
- Mark, Nelson C., 1990. "Real and nominal exchange rates in the long run: An empirical investigation," Journal of International Economics, Elsevier, vol. 28(1-2), pages 115-136, February.
- Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc.
- Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
- Kaddour Hadri, 1999.
"Testing For Stationarity In Heterogeneous Panel Data,"
1999_04, University of Liverpool Management School.
- Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
- Jaroslava Hlouskova & Martin Wagner, 2005.
"The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study,"
Economics Working Papers
ECO2005/05, European University Institute.
- Jaroslava Hlouskova & Martin Wagner, 2006. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Econometric Reviews, Taylor & Francis Journals, vol. 25(1), pages 85-116.
- Jaroslava Hlouskova & Martin Wagner, 2005. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Diskussionsschriften dp0503, Universitaet Bern, Departement Volkswirtschaft.
- John Williamson, 2000.
"Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option,"
Peterson Institute Press: All Books,
Peterson Institute for International Economics, number pa60, December.
- John Williamson, 2000. "Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa60, 03.
- Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-09-00339. 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: (John P. Conley)
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.