Purchasing Power Parity and Nonlinear Real Exchange Rate Adjustment: Evidence From High-Growth Countries

This study applies nonlinear KSS unit root test (Kapetanios, Shinb, and Snell, 2003) and an Asymmetric Exponential Smooth Transition Auto-Regressive (AESTAR) unit root test, proposed by Sollis (2009), to investigate the validity of long-run Purchasing Power Parity (PPP) for six high-growth countries...

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Bibliographic Details
Published inJing ji lun wen cong kan Vol. 45; no. 2; pp. 195 - 224
Main Author 陳鳳琴(Feng-Chin Chen)
Format Journal Article
LanguageEnglish
Chinese
Published 台灣 臺灣大學經濟學系 01.06.2017
國立臺灣大學經濟學系
Taiwan Economic Review
Subjects
AESTAR test
AESTAR 檢定
American dollar
asymmetric
Bias
EconLit
Economic policy
Emerging markets
Equilibrium
Foreign exchange rates
high-growth countries
Hypotheses
Nonlinear programming
nonlinear unit root test
Purchasing power parity
Studies
TSSCI
Validity
購買力平價
非對稱
非線性單根檢定
高成長國家
Brazil
Mexico
South Korea
United States > US
China
Indonesia
非對稱
購買力平價
AESTAR 檢定
AESTAR test
high-growth countries
asymmetric
purchasing power parity
nonlinear unit root test
高成長國家
非線性單根檢定
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Summary:This study applies nonlinear KSS unit root test (Kapetanios, Shinb, and Snell, 2003) and an Asymmetric Exponential Smooth Transition Auto-Regressive (AESTAR) unit root test, proposed by Sollis (2009), to investigate the validity of long-run Purchasing Power Parity (PPP) for six high-growth countries. The empirical results indicate that PPP holds for five of the six high-growth countries studied, namely Brazil, China, Indonesia, Mexico and South Korea, using the KSS test. Furthermore, using Sollis (2009) AESTAR unit root test reveals that real appreciations in the value of the Indonesia Rupiah-U.S. and Korea Won-U.S. dollar exchange rate are slower to revert do the mean (nonlinearly) than depreciations of the same proportionate amount, and the adjustment toward PPP is found to be nonlinear and asymmetric. On the other hand, Brazil/USD, China/USD and Mexico/USD adjustments are found to be nonlinear and symmetric. The governments of these five countries can use PPP to determine whether a currency is overvalued or undervalued, as well as if the country is experiencing differences between domestic and foreign inflation rates. These results have important policy implications for the emerging high-growth economies in this study.
ISSN:1018-3833
DOI:10.6277/TER.2017.452.1