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Nonlinear relationship between the real exchange rate and economic fundamentals: Evidence from China and Korea

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  • Tang, Xiaolei
  • Zhou, Jizhong

Abstract

This paper investigates the potential nonlinear relationship between the real exchange rates of two currencies (Chinese Yuan and South Korean Won) and economic fundamentals using quarterly data over the period 1980Q1–2009Q4. We employ the Alternating Conditional Expectation algorithm to test for nonlinearity among the variables of interest. The results show that there does exist a nonlinear cointegrating relationship between the real exchange rates and fundamentals for China and Korea. In contrast with the conventional linear relationship, the elasticity of the real exchange rate with respect to fundamentals varies over time according to the nonlinear relationship.

Suggested Citation

  • Tang, Xiaolei & Zhou, Jizhong, 2013. "Nonlinear relationship between the real exchange rate and economic fundamentals: Evidence from China and Korea," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 304-323.
  • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:304-323
    DOI: 10.1016/j.jimonfin.2012.04.010
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    References listed on IDEAS

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    1. repec:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9469-5 is not listed on IDEAS
    2. Irina Dubova, 2016. "Modeling Russia’s exchange rate in the long-run," International Economics and Economic Policy, Springer, vol. 13(3), pages 499-518, July.
    3. Wang, Weiguo & Xue, Jing & Du, Chonghua, 2016. "The Balassa–Samuelson hypothesis in the developed and developing countries revisited," Economics Letters, Elsevier, vol. 146(C), pages 33-38.

    More about this item

    Keywords

    Equilibrium exchange rate; Alternating Conditional Expectation algorithm; Linear cointegration; Nonlinear cointegration;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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