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

  • Kyttack Hong

    ()

    (Department of Economics, Chung-Ang University)

  • Dong-Hwan Oh

    (Department of Economics, Chung-Ang University)

Registered author(s):

    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.

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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 34 (2009)
    Issue (Month): 2 (December)
    Pages: 111-130

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    Handle: RePEc:jed:journl:v:34:y:2009:i:2:p:111-130
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    1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    2. Michael Sager, 2006. "Explaining the persistence of deviations from PPP: a non-linear Harrod-Balassa-Samuelson effect?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 41-61.
    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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