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

Abstract

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.

Currency Crises and Purchasing Power Parity in the Asian Countries: Evidence Based on Second-Generation Panel Unit-Root Tests

“…Box plot of the fitted residuals 10 Maican and Sweeney (2013) who considered several specifications found that the linear model is superior to the nonlinear specification and may help to explain the PPP puzzle. Our work seems to support their view in the sense that the PPP puzzle is not an issue in the countries under review; see Baharumshah et al (2015). In most of the Asian countries, large swings occurred in currency markets during the AFC.…”

“…on the type of testing models and outcome of unit-root tests (Zhou & Kutan, 2011). It should be mentioned here that the speed of adjustment to PPP tends to be faster during crisis (uncertainty) periods as proven in Baharumshah et al (2015). Specifically, we observed that the speed of convergence vis-à-vis the dollar (as measured by the half-life estimates) is faster for the post-crisis period; see also Ozdemir and Cakan (2010) on similar issue.…”

“…As currency crisis does not affect permanently the link between exchange rate and relative prices, PPP long-run equilibrium is a useful benchmark when assessing an exchange rate misalignment. A recent addition to the literature on the subject (e.g., Maican & Sweeney, 2013;Baharumshah et al, 2015) Figure 1. Box plot of the fitted residuals 10 Maican and Sweeney (2013) who considered several specifications found that the linear model is superior to the nonlinear specification and may help to explain the PPP puzzle.…”

“…Although panel data framework has been used in the past to deal with (low) power of the tests, it is not free from criticisms; see O'Connell (1998) and Taylor and Sarno (1998). It is well known that the RER in different countries may 3 Baharumshah, Soon and Wohar (2015) have shown that the half-life estimates of Asian currencies are less than two years with tight confidence intervals. be contemporaneously correlated (Pesaran, 2007).…”

Persistence of Real Exchange Rates in the Central and Eastern European Countries

“…We formally test (ˆn Q ) the null (Table 3) show that all of the d are significantly different from zero. As in Kim and Lima (2010) and Baharumshah et al (2015), we find strong support of the locally persistent process in the RER. Table 4 summarizes the proportion of upper-bound estimates of half-lives for three time intervals (less than 6 months, from 6-12 months, and more than 12 months) for 11 CEE countries, EU-5, and EU-16 (11 CEE plus EU-5) countries.…”