Narrow Results

This study re-examines the validity of the relationship between the Singapore dollar–U.S. dollar exchange rate and relative prices using the latest econometric methodologies that account for non-linearity. Among others, this study finds Exponential Smooth Transition Autoregressive (ESTAR)-type non-linear mean-reverting adjustment process of the nominal Singapore dollar–U.S. dollar rate towards the consumer price index ratio. Unlike previous findings of a linear cointegration relationship between the nominal Singapore dollar–U.S. dollar exchange rate and consumer price index ratio, this study shows that the relationship is in fact non-linear in nature. The major economic implications of our findings are: (1) policy makers need to take non-linearity into consideration in their policy decisions; (2) the Monetary Authority of Singapore (MAS) is able to maintain the macroeconomic equilibrium despite the authority's strong dollar policy; and (3) one should keep track of Singapore's monetary policy and other innovations in aggregate demand in order to closely monitor the movement of the Singapore exchange rate.

Relative population growth affects relative prices through the so-called Balassa–Samuelson (BS) mechanism and that in turn impacts PPP. This paper empirically investigates the relationship between the PPP exchange rate and relative population growth in a panel of 80 selected countries. Following the BS hypothesis, this paper argues that relative population growth affects nominal wages that impact price levels and thereby impacts PPP. Using panel cointegration and fully modified ordinary least square (FMOLS), the empirical results show that there is a stable relationship between PPP exchange rate and relative population growth in the long run. These empirical findings suggest that population growth have an important role in exchange rate determination through PPP.

A common view among recent studies on purchasing power parity is that the post-Bretton Woods period is far too short to reveal any significant parity reversion in individual series of real exchange rates. The answer depends on the statistical techniques being used. This study uses alternative econometric time-series technique, which does not require long sample sizes, and reports strong evidence of mean reversion in dollar-based real exchange rates. Further analysis of the estimated impulse responses indicates that the persistence in real exchange rate changes is difficult to detect because the short and long run dynamics interact in such a way that the impulse response weights exhibit a rapid decay.

Vector error-correction models (VECM) are increasingly being used to capture dynamic relationships between financial variables. Estimation and interpretation of such models can be enhanced if zero restrictions are allowed in the coefficient matrices. Conventional use of full-order models may weaken the power of statistical inferences due to over-parameterization. The paper demonstrates the usefulness of this approach for the analysis of exchange rate relationships. Specifically, the paper examines the relationship between the money supply and the Euro and provides a test of purchasing power parity (PPP) in Japan. The latter test results shed light on the adjustment mechanisms through which PPP is achieved. In addition, it is clear that the proposed ZNZ patterned VECM modeling provides better insights from this kind of financial time-series analysis. The paper also shows that causality detection in an I(d) system can be revealed identically from the ZNZ patterned VECMs or the equivalent VAR models.

This study is an attempt to examine whether the deviations of purchasing power parity and uncover interest rate parity Granger-cause the 1997 Asian financial crisis by using vector autoregression and Granger causality tests. The results show that the purchasing power parity and uncover interest rate parity do not hold for most Asian markets. We find weak evidence to support that the deviations of purchasing power parity and uncover interest rate parity have the power to explicate the origin of the financial crisis.

The behavior of exchange rates has been an important issue in the international finance literature. Although exchange rate is erratic and unpredictable in the short run, its long-run behavior is believed to be guided by economic fundamentals. This paper empirically tests the long-run determinants of the exchange rate by focusing on the Taiwan/US case. After incorporating productivity differential, foreign reserves, and monetary base in the absolute Purchasing Power Parity (PPP) proposition, where the relative price is the only determinant of the exchange rate, the Johansen's maximum likelihood test results indicate these determinants and the exchange rate are indeed cointegrated: thus a long-run relationship can be established.

Since the introduction of asymmetric cointegration and error-correction modeling, old theories have been getting a renewed attention, and purchasing power parity theory (PPP) is no exception. In this paper, we revisit the PPP by applying this relatively new technique. When we applied the symmetric cointegration test of Pesaran et al. [Pesaran, MH, Y Shin and RJ Smith (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326], we found cointegration between the nominal exchange rate and relative prices in 22 out of 82 countries. However, application of the asymmetric cointegration method of Shin et al. [Shin, Y, B Yu and M Greenwood-Nimmo (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In R. Sickels and W. Horrace (eds.), Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications, pp. 281–314. New York: Springer] increased the number to 51 out of 82 countries. Nonlinear adjustment of relative prices was said to be the main contributing factor.

This study investigates how the Asian Monetary Unit (AMU) deviation indicators for surveillance of East Asian currencies are improved by changing their benchmark rates from the constant 2000–2001 rates to time-varying ones based on purchasing power parities (PPPs). Consumer price indexes (CPIs) are used to calculate PPPs as a time-varying benchmark for AMU deviation indicators. Because CPIs include the prices of non-tradable goods, PPPs based on CPIs have a problem relating to the Balassa–Samuelson effect. Therefore, the PPPs adjusted by the Balassa–Samuelson effect should be used for calculation when CPIs are used for price data. This study compares the PPP-based AMU deviation indicator with the one adjusted by the Balassa–Samuelson effect. We conclude that both the indicators are useful for surveillance of overvaluation or undervaluation of intra-regional exchange rates of East Asian currencies.