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Currency Crises and Purchasing Power Parity in the Asian Countries: Evidence Based on Second-Generation Panel Unit-Root Tests

Author

Listed:
  • Siew-Voon Soon

    (Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia)

  • Ahmad Zubaidi Baharumshah

    (Financial Economics Research Centre, Faculty of Economics and Management, Universiti Putra Malaysia)

  • Nurul Sima Md. Shariff

    (Faculty of Science and Technology, Universiti Sains Islam Malaysia)

  • Saifuzzaman Ibrahim

    (Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia)

Abstract

This study applies a second-generation panel unit-root tests to determine the stochastic properties of real exchange rates for 14 Asian countries. Based on three popular alternative definitions of a currency crisis, we identify the several important currency crisis episodes in the region. The purchasing power parity (PPP) hypothesis was overwhelmingly supported after accommodating these heterogeneous noisy and unstable observations. Our panel unit-root test that controls for cross-sectional dependence and is robust to structural breaks confirms that the crisis in all the countries fits well with the second-generation models of currency crisis, that is, the root cause of the currency crises may not lie in economic fundamentals. PPP relation emerges when breaks and cross country dependency has been taken into account for these 14 countries.

Suggested Citation

  • Siew-Voon Soon & Ahmad Zubaidi Baharumshah & Nurul Sima Md. Shariff & Saifuzzaman Ibrahim, 2017. "Currency Crises and Purchasing Power Parity in the Asian Countries: Evidence Based on Second-Generation Panel Unit-Root Tests," Malaysian Journal of Economic Studies, Faculty of Business and Economics, University of Malaya & Malaysian Economic Association, vol. 54(1), pages 41-59, June.
    • Handle: RePEc:mjr:journl:v:54:y:2017:i:1:p:41-59
    DOI: 10.22452/MJES.vol54no1.3
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    More about this item

    Keywords

    Asian; cross-sectional dependency; real exchange rate; second-generation models;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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