Exchange Rate Reversion Under Regimes Other Than Free Float

Abstract

Several studies indirectly point out that the exchange rate system may be one of the factors for establishing purchasing power parity (PPP). However, current researches on PPP have mainly focused on the recent floating period and need various statistical models to carry out. We use quantile autoregression technique to comprehensively examine the mean reversion properties of the New Taiwan Dollar (NTD), where the NTD was both in a fixed regime period and a managed floating system period. Empirical findings indicate that NTD showed comparatively faster recovery when subjected to a larger or positive disturbance from the market. Additionally, when NTD was in a fixed regime period, PPP was mostly established. But during the managed floating system period, it was only partially established. These results suggest that mean reversion of real exchange rate heavily depends on the regime effect. Copyright © 2012 John Wiley & Sons, Ltd.

Central Bank Intervention, Exchange Rate Regime and the Purchasing Power Parity

“…On the other hand, for the first differences of the exchange rate series, the null hypothesis of a unit root is rejected at the significance level of 1 per cent for all. These results are similar to those reported in the literature, in particular, Nikolaou () and Lin and Lin (). During the fixed exchange rate regime, we observe that the unit root hypothesis is rejected for NTD/PP at the 5 per cent significance level based on both test statistics and for NTD/SD at the 10 per cent level based on the PP test statistic.…”

“…In the examination of the long‐run PPP and the relative importance of nominal exchange rates and prices in restoring PPP in G5 countries using over a century of data, Sarno and Valente () specifically incorporate different exchange rate regimes in their proposed empirical model and find evidence that mean reversion varies across different exchange rate regimes. Recently, Lin and Lin () examined the exchange rates of the NTD to two major currencies, the US dollar and the Japanese yen, and find robust evidence of mean reversion during the period of the fixed exchange rate regime. However, during the floating rate period, mean reversion happens for NTD/¥, but not for NTD/$.…”

“…Most studies, for exampleBaharumshah et al (2007), use AR(1) in performing the unit root tests. Similarly, in performing quantile unit root tests,Nikolaou (2008) andLin and Lin (2013) use QAR(1). To allow for comparison with these studies, we follow QAR(1) and report the results based on QAR(1).…”

Asymmetric Fluctuating Behavior of China's Housing Prices

“…Koenker and Xiao (2006) use the quantile autoregressive model to explore the behaviors of unemployment rates, short-term interest rates and oil prices in the USA. Lin and Lin (2013) compare the mean reversion of the new Taiwan dollar real exchange rate in various exchange-rate systems. Lee et al (2014) discuss asymmetric reversion in the prices of real estate investment trusts.…”

Dynamics of the real exchange rate in European emerging economies: Evidence from quantile regression

“…Quantile models are furthermore suitable for the analysis of the dynamics of the RER under different exchange rate regimes. Applying the quantile unit root test to the data of the RER of New Taiwan Dollar from 1974 to 2008, Luke Lin and Wenyuan Lin (2013) point out the validity of PPP theory in circumstances of applying a fixed regime, whereas the implementation of a managed float regime can induce only partial compliance with the PPP level. The results in the article of Mauro S. Ferreira (2011), which are based on the behavior of pair wise RER between the Italian lira, French franc, Deutsch mark and British pound from January 1973 to December 1998 also show adequate implementation of QAR model in the case of the presence of heteroskedastic time series and different expectations about the RER movements.…”