Commodity currencies and the real exchange rate

This paper shows that a change in the terms of trade of a commodity-exporting country could cause the relative price of nontraded goods to rise or fall, depending on the strength of income and substitution effects.     

The persistence in real exchange rate: Evidence from East Asian countries

In this article, we examine the degree of persistence in monthly real exchange rate of six East Asian countries in relation to their two major trading partners, the United States and Japan, to study the validity of PPP for the 1976:01–2009:03 period. To investigate the persistency in real exchange rate series, we use sum of the autoregressive (AR) coefficients and the confidence interval for it using grid-bootstrap procedure recently developed by Hansen (1999). We have two findings: first, we find evidence for high persistency in real exchange rate in terms of the Japanese yen for five countries and for four countries in terms of the US dollar the for the full and pre-crisis sample periods. Second, for the post-crisis period, the presence of low persistency in real exchange rate supports PPP for three countries in terms of the Japanese yen and five countries in terms of the US dollar. These findings indicate that real exchange rate series of five East Asian countries are mean-revert based on their exchange rate policies and East Asian countries can form a currency union.     

Parity reversion in the Asian real exchange rates: new evidence from the local-persistent model

This article investigates the time-series properties of 13 Asian real exchange rates (RERs) vis-à-vis the US dollar. The half-life point estimates drawn from the local-persistent model are all less than 2 years, with a finite upper bound. There is no evidence to indicate that the Asian financial crisis has altered the speed of the purchasing power parity (PPP) adjustments. We find that the persistence of RERs over the last three decades remains unchanged in majority of the cases. Given the fairly rapid speed of adjustments and their corresponding confidence intervals, we conclude that the PPP puzzle does not exist in these countries.     

Asian real interest rates, nonlinear dynamics, and international parity

This study tests for nonlinearities in the real interest differentials of four South East Asian economies with respect to Japan and the United States. The logistic and exponential smooth transition regression models are applied to monthly data over the sample period 1977M1–2000M3. There is evidence of nonlinearities in Asian real interest differentials where nonlinearities are often captured by the logistic smooth transition autoregressive (STAR) model. The extent of nonlinearities varies across the sample with the Singapore–Japan and Thailand–Japan differentials exhibiting the sharpest transition from one regime to another. Large shocks to real interest parity (RIP) are more likely to lead to the reestablishment of parity at a faster rate than small shocks. Modeling the nonlinear stochastic dynamics of RIP can thus be useful for policymaking purposes in recovering information on monetary and financial crises.     

New tests for stationarity and parity reversion: Evidence on New Zealand real exchange rates

The present paper discusses the stochastic stationarity of New Zealand exchange rates in light of new time series methods and new tests. The question of whether the real exchange rates have a unit root or are mean reverting is set in the general framework of fractionally integrated models. The estimates sustain the claim that New Zealand real exchange series are not stationary. However, it is shown that nonstationarity is compatible with parity reversion in the framework of fractional unit-root models.     

Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets

This study examines dynamic linkages between exchange rates and stock prices for seven East Asian countries, including Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand, for the period January 1988 to October 1998. Our empirical results show a significant causal relation from exchange rates to stock prices for Hong Kong, Japan, Malaysia, and Thailand before the 1997 Asian financial crisis. We also find a causal relation from the equity market to the foreign exchange market for Hong Kong, Korea, and Singapore. Further, while no country shows a significant causality from stock prices to exchange rates during the Asian crisis, a causal relation from exchange rates to stock prices is found for all countries except Malaysia. Our findings are robust with respect to various testing methods used, including Granger causality tests, a variance decomposition analysis, and an impulse response analysis. Our findings also indicate that the linkages vary across economies with respect to exchange rate regimes, the trade size, the degree of capital control, and the size of equity market.     

The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies

Utilizing the formal linearity test of Luukkonen, Saikkonen and Teräsvirta (Biometrika, 75, 491-499, 1998) as diagnostic tool, the empirical finding suggests that the linear autoregressive (AR) model is inadequate in describing the real exchange rates behaviour of 11 Asian economies. It is noted that the conventional battery of diagnostic tests is capable of identifying the inadequacy of the linear model in only three of these series. Moreover, the linearity nature of this behaviour has been formally rejected in favour of the non-linear smooth transition autoregressive (STAR) model. The finding of non-linearity in the data generating process of these real exchange rates warrants that the use of linear framework in empirical modelling and statistical testing procedures in the field of exchange rates may lead to an inappropriate policy conclusions.     

Bilateral real exchange rates and migration

Migrants who move across borders are, to a large extent, motivated by the prospect of earning higher incomes at destination, which can be partly transferred back to their countries of origin via remittances. This suggests that the real exchange rate can influence the incentives to migrate, as it determines the purchasing power of expected income in terms of the currency of the origin country. This article investigates empirically how bilateral real exchange rate fluctuations influence international migration flows. To do so, we build a dataset of 30 OECD destination countries and 165 origin countries over the period 1980–2011 and estimate an equation derived from a micro-founded random utility maximization model that allows for unobserved heterogeneity between migrants and non-migrants. Our results show that migration flows are highly responsive to bilateral real exchange rates: A 10% real appreciation of the currency of the destination country is associated with an 18.2–19.4% increase in migration flows.     

The equilibrium exchange rates of European currencies and the transition to euro

This study estimates the demand system using Japanese micro data and calculates the cost of living index (COLI) to assess the substitution bias in the Consumer Price Index. The estimated bias during the sample period of 1982–2000 is about 0.06 percentage points, which is larger than the estimates calculated from a superlative index. The difference between the COLI and a superlative index can be explained with the upward movements of the average utility level in Japan, since the cost of living for the rich has grown more rapidly than that for the poor.     

Decomposing the persistence of real exchange rates

We propose a new methodology for decomposing the persistence of deviations from purchasing power parity (PPP). By directly comparing the impulse response function (IRF) of a vector autoregressive (VAR) model, where the real exchange rate is Granger caused by a set of candidate variables, with the IRF of the equivalent ARMA model for the real exchange rate, we capture the effects of the Granger-causing variables on the half-life of deviations from PPP. Our empirical results for a set of 20 industrial countries suggest that on average around 50% of the persistence of real exchange rates can be attributed to nominal interest rate differentials, inflation differentials and relative business cycle position with the numenaire country. Finally, we provide confidence intervals for the contributions of the aforementioned variables to the persistence of deviations from PPP by means of Monte Carlo simulations.     

Modelling regime shift behaviour in Asian real interest rates

In this paper we investigate whether real interest rates for a number of Asian economies are constant but subject to occasional jumps using the Markov switching technique. We find evidence that all six rates under consideration have generally been stable, only shifting in response to either international or country-specific shocks.     

Non-linearity versus non-normality in real exchange rate dynamics

We distinguish non-normality from non-linearity in G7 real exchange rate dynamics by correcting the critical values of the Kapetanios et al. [Kapetanios, G., Shin, Y., Snell, A., 2003. Testing for a unit root in the non-linear STAR framework. Journal of Econometrics, 112, 359–379] test for non-normality using the wild bootstrap. Our findings validate non-linear Purchasing Power Parity net of non-normality effects.     

Chaos in East European black market exchange rates

In this paper we test for deterministic chaos in seven East European black market exchange rates, using Koedijk and Kool's (1992, Journal of Business and Economic Statistics, 10, 83-96) monthly data from January 1955 through May 1990. In doing so we use three (non-parametric) inference methods, the BDS (Brocket al., 1996, Econometric Reviews, 15, 197-235) test for whiteness, the Lyapunov exponent estimator of Nychkaet al.(1992, Journal of the Royal Statistical Society, 12, 135-136) as well as the Lyapunov exponent estimator of Gencay and Dechert (1992, Physica D, 59, 142-157). We find some consistency in inference across methods, and we conclude, based on the Nychkaet al.(1992) estimator, that there is evidence consistent with a chaotic non-linear generation process in only two out of seven series.     

Parity reversion persistence in real exchange rates: middle income country case

This article investigates purchasing power parity (PPP) in the specific context of middle income countries. To circumvent the low power of traditional stationarity tests (Augmented Dickey-Fuller and Phillips-Perron tests), it performs variance ratio and fractional integration tests in addition to Perron's test that accounts for potential structural changes in real exchange rate processes. Beyond estimating half-life shocks to PPP, this article attempts to explain these estimates using a set of country specific variables as suggested by economic theory. The evidence suggests that reversion to parity tends to be faster in high inflation countries and that productivity improvement leads to a higher level of persistence. Openness to trade tends to reduce the extent of deviations from parity but this result does not appear to be statistically robust. Evidence shows also that deviations are less persistent under a fixed exchange rate regime and under unrestricted capital mobility.     

Stationarity of Asian real exchange rates: An empirical application of multiple testing to nonstationary panels with a structural break

This paper investigates the stationarity of the real exchange rates of the currencies for ten Asian countries against the US dollar during the pre-Lehman period. This paper explicitly investigates the presence of a structural break that occurred at unknown dates across countries and which may have been caused by the Asian financial crisis in 1997–1998. To identify which of the ten countries hold real exchange rate stationarity, that is, long-run Purchasing Power Parity, the resampling-based multiple testing proposed by Romano and Wolf (2005) is employed while dealing with possible cross-sectional correlation among the countries and avoiding the over-rejection of the null hypothesis or the multiplicity problem. Moreover, the paper examines the small-sample property of the multiple testing when there is a structural break in cross-sectionally dependent panels. Finally, the empirical results show that the stationarity hypothesis of the real exchange rate is significantly supported in some Asian countries.     

Inflation targeting and real exchange rates: A bias correction approach

This paper examines whether inflation targeting (IT) influences purchasing power parity (PPP) by a bias correction approach under cross-sectional dependence. The recursive mean adjustment (RMA) method proposed by So and Shin (1999) and Shin and So (2001) is employed to correct a downward bias in half-life estimates of real exchange rates. More importantly, the empirical results show that IT lowers variability of real exchange rates and plays an important role in providing favorable evidence for long-run PPP.     

Real exchange rates and real interest rates once again: a multivariate panel cointegration analysis

This paper employs multivariate panel cointegration techniques to re-examine the empirical relationship between bilateral real exchange rates and real interest rates. The results from a panel of 1470 quarterly observations on Canada, France, Germany, Italy, Japan, UK, and USA over the period 1977 to 1994 indicate the absence of any long-run relationship between the two variables.     

Long-run versus short-run behaviour of the real exchange rates

This paper discusses the mean stationarity of real exchange rates by using new time series methods and new tests. The question whether the real exchange rates have a unit root or are level reverting is set in the general and flexible framework of fractionally integrated processes. The estimations and tests sustain the claim that real exchange rates may be nonstationary and not revert to any short-run parity. However, estimations also suggest that real exchange rates behave differently on the short and on the long run and that they may revert to parity in a century-long period.