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Non-Linear Adjustment Process In Won/Dollar And Won/Yen Real Exchage Rates

Author

Listed:
  • Kyttack Hong

    (Department of Economics, Chung-Ang University)

  • Dong-Hwan Oh

    (Department of Economics, Chung-Ang University)

Abstract

We examine the purchasing power parity (PPP) hypothesis in won/dollar and won/yen real exchange rates using a non-linear framework. Many empirical studies based on the linear framework have failed to find clear supporting evidence for the validity of PPP hypothesis. We test the PPP hypothesis using a two-stage procedure suggested by Engle and Granger (1987), and show that it fails to reject non-cointegration. Evaluating the linear model against the nonlinear STAR model, we find that linearity is clearly rejected, but ESTAR process is accepted. Moreover, the parameter estimates of the ESTAR model establish a certain pattern of random walk behavior for small deviations and of fast adjustment for large deviations, thus providing strong evidence for mean-reverting behavior in real won/dollar and won/yen exchange rates.

Suggested Citation

  • Kyttack Hong & Dong-Hwan Oh, 2009. "Non-Linear Adjustment Process In Won/Dollar And Won/Yen Real Exchage Rates," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(2), pages 111-130, December.
    • Handle: RePEc:jed:journl:v:34:y:2009:i:2:p:111-130
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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
    3. Mohammad Hasan, 2006. "A century of Purchasing Power Parity: evidence from Canada and Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 145-156.
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    More about this item

    Keywords

    Purchasing Power Parity; Non-linear Adjustment Process; ESTAR Model;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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