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Extended generalized purchasing power parity and optimum currency area in East Asian countries

Author

Listed:
  • Poomthan Rangkakulnuwat
  • Sung Ahn
  • Holly Wang
  • Susan He

Abstract

This article extends the theory of generalized purchasing power parity (G-PPP) by developing a model including foreign variables such as the real money supply, output and interest rate. A cointegration rank test with two structural breaks in the deterministic trend was adopted to selected Asian countries, with Japan as the base country. There were two cointegrating vectors and six common stochastic trends in the model. The cointegrating vectors were estimated by the same approach used by Pesaran et al. (2000). The first cointegrating vector is interpreted as G-PPP, and the second one is interpreted as the extended G-PPP. According to G-PPP, these countries could form a single currency area. The first stochastic trend is primarily driven by Japan's real money supply; the second, third and fourth by the real exchange rates of the Philippines, Singapore and Thailand, respectively; the fifth by Japan's output; and the sixth by Japan's government bond yields.

Suggested Citation

  • Poomthan Rangkakulnuwat & Sung Ahn & Holly Wang & Susan He, 2010. "Extended generalized purchasing power parity and optimum currency area in East Asian countries," Applied Economics, Taylor & Francis Journals, vol. 42(4), pages 497-513.
  • Handle: RePEc:taf:applec:v:42:y:2010:i:4:p:497-513
    DOI: 10.1080/00036840701663269
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    References listed on IDEAS

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    1. Hong Liang, 1999. "Do Hong Kong SAR and China Constitute An Optimal Currency Area? An Empirical Test of the Generalized Purchasing Power Parity Hypothesis," IMF Working Papers 99/79, International Monetary Fund.
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    Cited by:

    1. de Truchis, Gilles & Keddad, Benjamin, 2013. "Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 394-412.
    2. Khalid Kisswani & Salah Nusair, 2014. "Nonlinear convergence in Asian interest and inflation rates: evidence from Asian countries," Economic Change and Restructuring, Springer, vol. 47(3), pages 155-186, August.

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