Paper Status Tracking

Journals by Title

Journals by Subject

Contact us

	[email protected]
	3275638434

	Paper Publishing WeChat

Useful Links

Creative Commons Attribution-NonCommercial 4.0 International License

Article

Open Access

Real Exchange Rate Behavior: Evidence From Malaysia, Singapore, and Thailand

Author(s)

Kit Soon Tan, Lan Thi Phuong Nguyen, Malick Ousmane Sy, Cheng Ming Yu

Full-Text PDF Download XML 6017 Views

DOI:10.17265/2328-7144/2015.0910.001

Affiliation(s)

Kit Soon Tan, BFE student, Multimedia University, Cyberjaya, Malaysia.
Lan Thi Phuong Nguyen, Ph.D., senior lecturer, Faculty of Management, Multimedia University, Cyberjaya, Malaysia.
Malick Ousmane Sy, Ph.D., professor of finance, School of Economics, Finance and Marketing, RMIT, Melbourne, Australia.
Cheng Ming Yu, Ph.D., professorial chair, Faculty of Accountancy and Management, UTAR, Kuala Lumpur, Malaysia.

ABSTRACT

In this paper, the mean reversion behavior of CPI-based real exchange rates in US dollar is investigated for three Southeast Asian economies: Malaysia, Singapore, and Thailand. Using linear and non-linear unit root tests to detect possible endogenous break(s), real exchange rates for currencies of the three countries are examined for the long-run purchasing power parity (PPP) during the period of January 1980 to December 2014. Results show that structural breaks mostly occur in two periods: 1985 and 1997/1998, and that, the evidences for the PPP hypothesis are relatively mixed for these three countries. Results obtained from all test fail to provide sufficient evidences for the non-linear adjustment of real exchange rates towards PPP. The misalignment in exchange rates cannot be found during the study period due to a relatively high persistency of real exchange rates (half-life > three years) found for all the three countries. Moreover, Engle-Granger procedure and Johansen multivariate cointegration methods are also carried out. The results indicate that a stronger evidence of PPP exists for the three countries relative to the USA after allowing for the presence of structural break(s), implying that the three Asian countries were affected by global financial crises during the study period. In brief, the findings reveal that misalignment in the three Southeast Asia economies is relatively slow; both exchange rates and price levels of these countries converge in the long run.

KEYWORDS

purchasing power parity (PPP), real exchange rate, unit root tests, endogenous break, exchange rate behavior, Engle-Granger cointegration test, Johansen cointegration test

Cite this paper

References

Aggarwal, R., & Mougoue, M. (1996). Cointegration among Asian currencies: Evidence of the increasing influence of the Japanese yen. Japan and the World Economy, 8, 291-308.

Aron, J., Elbadawi, I., & Kahn, B. (1997). Determinants of the real exchange rate in South Africa (Working paper WPS/97-16). Oxford: Oxford University, Centre for the Study of African Economies.

Cassel, G. (1918). Abnormal deviations in international exchanges. Economic Journal, 28, 413-415.

Catherine, S. F. H., & Ariff, M. (2009). A test of purchasing power parity: Asia Pacific and Latin America. Asian Academy of Management Journal of Accounting and Finance, 5(2), 33-53.

Chinn, M. D. (2000). Before the fall: Were East Asian currencies overvalued? Emerging Market Review, 1, 101-126.

Edison, H. J. (1985). Purchasing power parity: A quantitative reassessment of the 1920s experience. Journal of International Money and Finance, 4, 361-372.

Elliott, G., & Pesavento, E. (2004). Higher power tests for bilateral failure of PPP after 1973 (Unpublished manuscript, Emory University).

Engle, R. F., & Yoo, B. S. (1987). Forecasting and testing in co-integrated systems. Journal of Econometrics, 35, 143-159.

Frenkel, J. (1978). Purchasing power parity, doctrinal perspective and evidence from the 1920s. Journal of International Economics, 8, 169-191.

Goldberg, L., & Tille, C. (2008). Macroeconomic interdependence and the international role of the dollar (Staff report 316, Federal Reserve Bank of New York).

Hakkio, C. S. (1984). A re-examination of purchasing power parity: A multi-country and multi-period study. Journal of International Economics, 17, 265-277.

Hall, A. (1994). Testing for a unit root in time series with pretest data-based model selection. Journal of Business & Economic Statistics, 12, 461-470.

Harvey, J. (2001). Exchange rate theory and “the fundamentals”. Journal of Post Keynesian Economics, 24 (1), 3-15.

Johansen, S., Mosconi, R., & Nielsen, B. (2000). Cointegration analysis in the presence of structural breaks in the deterministic trend. The Econometrics Journal, 3(2), 216-249.

Krugman, P. R. (1978). Purchasing power parity and exchange rates: Another look at the evidence. Journal of International Economics, 8(3), 397-407.

Lanne, M., Saikkonen, P., & Lütkepohl, H. (2003). Test procedures for unit roots in time series with level shifts at unknown time. Oxford Bulletin of Economics and Statistics, 65, 91-115.

Lothian, J. R., & Taylor, M. P. (1996). Real exchange rate behaviour: The recent float from the perspective of the last two centuries. Journal of Political Economy, 104, 488-510.

Lumsdaine, R. L., & Papell, D. H. (1997). Multiple trend breaks and the unit root hypothesis. Review of Economics and Statistics, 79, 212-218.

Mark, N. C. (1990). Real and nominal exchange rates in the long run: An empirical investigation. Journal of International Economics, 28, 115-136.

McCloskey, D. N., & Zecher, J. R. (1976). How the gold standard worked, 1880-1913 (In the monetary approach to the balance of payments). Toronto: University of Toronto Press.

Murray, C. J., & Papell, D. H. (2002). The purchasing power persistence paradigm. Journal of International Economics, 56, 1-19.

Ng, S., & Perron, P. (1995). Unit root tests in ARMA models with data-dependent methods for the selection of the truncation lag. Journal of the American Statistical Association, 90, 268-281.

O’Connell, P. (1998). The overvaluation of purchasing power parity. Journal of International Economics, 44, 1-19.

Papell, D. H. (1997). Searching for stationarity: Purchasing power parity under the current float. Journal of International Economics, 43, 313-332.

Papell, D. H. (2002). The great appreciation, the great depreciation, and the purchasing power parity hypothesis. Journal of International Economics, 57, 51-82.

Perron, P. (1989). The great crash, the oils price shock, and the unit root hypothesis. Econometrica, 57(1), 361-401.

Rappoport, P., & Reichlin, L. (1989). Segmented trends and nonstationary time series. Economic Journal, 99, 168-177.

Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic Literature, 34, 647-668.

Saikkonen, P., & Lütkepohl, H. (2002). Testing for a unit root in a time series with a level shift at unknown time. Econometric Theory, 18, 313-348.

Taylor, M. P. (2003). Purchasing power parity. Review of International Economics, 11(3), 436-452.

Zivot, E., & Andrews, D. (1992). Further evidence on the great crash, the oil price shock, and the unit root hypothesis. Journal of Business and Economic Statistics, 10, 251-270.