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On Equilibrium Exchange Rates: Is Emerging Asia Different?

  • Antonia López-Villavicencio
  • Valérie Mignon

The aim of this paper is to provide equilibrium exchange rates values for a large set of currencies and to study the adjustment process of observed exchange rates towards these levels by paying a special attention to emerging Asian countries. Relying on panel smooth transition regression models, we show that the real exchange rate dynamics in the long run is nonlinear for emerging Asian countries, while it is linear for the G7 currencies. More especially, there exists an asymmetric behavior of the real exchange rate when facing an over or undervaluation in Asia: the adjustment speed is more important in case of undervaluation, a result that may be explained by the international pressure to limit undervaluations. However, this adjustment being long-lasting, undervaluations may persist over time, as observed since the beginning of the 1990s.

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Paper provided by CEPII research center in its series Working Papers with number 2009-38.

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Date of creation: Dec 2009
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Handle: RePEc:cii:cepidt:2009-38
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