Exchange Rate – Relative Price Relationship: Nonlinear Evidence from Malaysia
Using nonlinear unit root tests developed by Kapetanios et al. (2003), we find strong evidence that the Consumer Price Index (CPI) and Wholesale Price Index (WPI) based Malaysian Ringgit – U.S. Dollar (MYR/USD) real exchange rates are nonlinear stationary, implying that MYR/USD nominal exchange rate and relative price are cointegrated regardless of price indices. The results in this study are supportive of Purchasing Power Parity (PPP) and are more robust than previous study, which did not take the nonlinear exchange rate adjustment behavior into consideration. Few principle implications may be drawn from this study. First, nonlinear PPP equilibrium may be regarded as reference point in judging the short run misalignment of the Ringgit currency and thereby deducing effective policy actions. Second, the effort of Bank Negara Malaysia (BNM) in managing the Ringgit in certain fluctuation bands has successfully maintained Malaysian’s macroeconomics equilibrium in the sample period of study. Third, economists who wish to extend the simple PPP exchange rate model into the more complicated monetary exchange models may do so comfortably, at least in the text of Malaysia. Nonetheless, such attempt should be tailored in a nonlinear way to suit the nonlinear characteristic of exchange rate behaviour.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan M. Taylor, 2002.
"A Century Of Purchasing-Power Parity,"
The Review of Economics and Statistics,
MIT Press, vol. 84(1), pages 139-150, February.
- Holmes, Mark J., 2001. "New Evidence on Real Exchange Rate Stationarity and Purchasing Power Parity in Less Developed Countries," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 601-614, October.
- Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
- Bertola, G. & Svensson, L.E., 1990.
"Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models,"
481, Stockholm - International Economic Studies.
- Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 689-712.
- Bertola, Giuseppe & Svensson, Lars E O, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," CEPR Discussion Papers 513, C.E.P.R. Discussion Papers.
- Giuseppe Bertola & Lars E.O. Svensson, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," NBER Working Papers 3576, National Bureau of Economic Research, Inc.
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-276, March.
- Christopher F. Baum & Mustafa Caglayan & John Barkoulas, 1998.
"Nonlinear Adjustment to Purchasing Power Parity in the post-Bretton Woods Era,"
Boston College Working Papers in Economics
404., Boston College Department of Economics, revised 16 Nov 1999.
- Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 2001. "Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 379-399, June.
- Chiu, Ru-Lin, 2002. "Testing the purchasing power parity in panel data," International Review of Economics & Finance, Elsevier, vol. 11(4), pages 349-362.
- Ashok Parikh & Geoffrey Williams, 1998. "Modelling real exchange rate behaviour: a cross-country study," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 577-587.
- Hasan, Zubair, 1999. "Recent financial crisis in Malaysia: response, results, challenges," MPRA Paper 21844, University Library of Munich, Germany, revised 2000.
- Garratt, Anthony & Psaradakis, Zacharias & Sola, Martin, 2001.
"An empirical reassessment of target-zone nonlinearities,"
Journal of International Money and Finance,
Elsevier, vol. 20(4), pages 533-548, August.
- Garratt, Anthony & Psaradakis, Zacharias & Sola, Martin, 1998. "An Empirical Reassessment of Target-zone Nonlinearities," Cambridge Working Papers in Economics 9825, Faculty of Economics, University of Cambridge.
- Peel, David & Sarno, Lucio & Taylor, Mark P, 2001.
"Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles,"
CEPR Discussion Papers
2658, C.E.P.R. Discussion Papers.
- 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.
- Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
- Sabate, Marcela & Gadea, Maria Dolores & Serrano, Jose Maria, 2003. "PPP and structural breaks. The peseta-sterling rate, 50 years of a floating regime," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 613-627, October.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Ma, Yue & Kanas, Angelos, 2000. "Testing for nonlinear Granger causality from fundamentals to exchange rates in the ERM," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 69-82, January.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Venus Khim-Sen Liew & Terence Tai-Leung Chong & Kian-Ping Lim, 2003. "The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1387-1392.
- Corbae, Dean & Ouliaris, Sam, 1991. "A Test of Long-Run Purchasing Power Parity Allowing for Structural Breaks," The Economic Record, The Economic Society of Australia, vol. 67(196), pages 26-33, March.
- Francisco Maeso-Fernandez, 1998. "Econometric methods and purchasing power parity: short- and long-run PPP," Applied Economics, Taylor & Francis Journals, vol. 30(11), pages 1443-1457.
- Dirk Te Velde, 2001. "Balance of payments prospects in EMU," NIESR Discussion Papers 178, National Institute of Economic and Social Research.
- Rapach, David E. & Wohar, Mark E., 2004. "Testing the monetary model of exchange rate determination: a closer look at panels," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 867-895, October.
- Azali, M. & Habibullah, M. S. & Baharumshah, A. Z., 2001. "Does PPP hold between Asian and Japanese economies? Evidence using panel unit root and panel cointegration," Japan and the World Economy, Elsevier, vol. 13(1), pages 35-50, January.
- Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0312001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.