||The relative performance of Asian countries’ exchange rates since 1990s’
||Graduate Institute of Finance & Banking
Real exchange rate
Purchasing power parity
Foreign direct investment
In this paper, we use the panel regression model to measure the relative performance on Asian currency. We measure the relationship between real exchange rate, gross domestic product relative to U.S. and growth in foreign direct investment. By observing the intercept term for every country, we can determine if the currency is relative undervalued or overvalued. In addition, we reassess the relative performance of exchange rate for each country during the Asian finance crisis in 1997.
The results of our study suggest that almost Asian currency is relative undervalued since 1990s’, except for Malaysia and Singapore. Also, the model with a new independent variable foreign direct investment (FDI) can actually capture a better measurement in currency valuation compared with the model we only taking GDP into consideration.
Lists of Tables VI
List of Figures VII
Chapter 1 Introduction 1
1.1 Background 1
1.2 Motivation and purpose 2
1.3 Research Framework 3
Chapter 2 Literature Review 4
2.1 Is PPP hold? 4
2.2 Relevant literature on the factors which can affect real exchange rate 5
Chapter 3 Methodology 8
3.1 The Panel models 8
3.2 Datasets 13
3.2.1 Real exchange rate 13
3.2.2 Gross domestic product 13
3.2.3 Foreign direct investment 14
Chapter 4 Empirical Results 15
4.1 Time-series regression for individual country 15
4.2 Panel regression: GDP as independent variable 16
4.2.1 Brief summary 17
4.3 Periodical history assessment 18
4.4 Panel regression: GDP and FDI as independent variables 18
Chapter 5 Conclusion 21
Adler, M. and Lehmann, B., “Deviations from Purchasing Power Parity in the Long Run,” Journal of Finance, Vol. 38, No. 5, pp. 1471-1487, 1983.
Balassa, B., “The Purchasing Power Parity Doctrine: A Reappraisal,” Journal of Political Economy, Vol. 72, No. 6, pp. 584-596, 1964.
Bhagwati, J. N., “Why are Services Cheaper in the Poor Countries?” Economy Journal, Vol. 94, No. 374, pp. 279-86, 1984.
Bosworth, B., “Valuing the Renminbi,” Paper presented at the Tokyo Club Research Meeting, pp. 9-10, 2004.
Brennan, M. J. and Cao, H. H., “International Portfolio Investment Flows,” The Journal of Finance, Vol. 52, No. 5, pp. 1851-1880, 1997.
Cairns, J., “China: How undervalued is the CNY?” IDEAglobal Economic Research, 2005.
Cheung, Y., Chinn, M., and Fujii, E., “The Overvaluation of Renminbi Undervaluation,” Journal of International Money and Finance, Vol. 26, No. 5, pp. 762-785, 2007.
Chinn, M., “The Usual Suspects? Productivity and Demand Shocks and Asia-Paciﬁc Real Exchange Rates,” Review of International Economics, Vol. 8, pp. 20-43, 2000.
Chinn, M. D., “Three Measures of East Asian Currency Overvaluation,” Contemporary Economic Policy, Vol. 18, No.2, pp. 205-214, 2000.
Chinn, M. D. and Ito, H., “What Matters for Financial Development? Capital Controls, Institutions and Interactions,” Journal of Development Economics, Vol. 81, pp. 163-192, 2006.
Chinn, M. D. and Prasad, E., “Medium-term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration,” Journal of International Economics, Vol. 59, No.1, pp. 47-76, 2003.
Click, R. W., “Contrarian MacParity,” Economics Letters, Vol.53, pp. 209-212, 1996.
Corbae, D. and Ouliaris, S., “Cointegration and Tests of Purchasing Power Parity,” Review of Economics and Statistics, Vol.70, No. 3, pp. 508-511, 1988.
Coudert, V. and Couharde, C., “Real Equilibrium Exchange Rate in China,” CEPII Working Paper, 2005.
Cushman, D. O., “Exchange-rate Uncertainty and Foreign Direct Investment in the United States,” Weltwirtsch. Arch. 124, pp. 322–336, 1988.
Doganlar, M., “Testing Long-run Validity of Purchasing Power Parity for Asian Countries,” Applied Economics Letters, Vol. 6, No. 3, pp. 147–151, 1999.
Fleissig, A. R. and Strauss, J., “Panel Unit Root Tests of Purchasing Power Parity for Price Indices,” Journal of International Money and Finance, Vol. 19, No. 4, pp. 489–506, 2000.
Frankel, J. A. and Rose A. K., “A Panel Project on Purchasing Power Parity: Mean Reversion Between and Within Countries,” Journal of International Economics, Vol. 40, pp. 209-224, 1996.
Frankel, J., “On the Yuan: the Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate,” CESifo Economic Studies, Vol. 52, No. 2, pp. 246-275, 2006.
Froot, K. A. and Stein, J. C., “Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach,” Quarterly Journal of Economics, Vol. 106, No. 4, pp. 1191–1217, 1991.
Funke, M. and Rahn, J., “Just How Undervalued is the Chinese Renminbi?” World Economy, Vol. 28, No. 4, pp. 465-489, 2005.
Keynes, J. M., Essay in Persuation. New York: Hardcourt Brace, 1932.
Klein, M. W. and Rosegren, E. S., “The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects,” Journal of International Economics, Vol. 36, No. 3-4, pp. 373-389, 1992.
Kugler, P. and Lenz, C., “Multivariate Cointegration Analysis and the Long-run Validity of PPP,” Review of Economics and Statistics, Vol. 75, No. 1, pp. 180–184, 1993.
MacDonald, R., “Long-run Purchasing Power Parity: is it for Real?” Review of Economics and Statistics, Vol. 75, No. 4, pp. 690–695, 1993.
Maddala, G. S. and Wu, S., “A Comparative Study of Unit Root Tests with Panel Data a New Simple Test,” Oxford Bulletin of Economics and Statistics, Special Issue, Vol. 61, pp. 631–652, 1999.
Mark, N. “Real and Nominal Exchange Rates in the Long Run: An Empirical Investigation,” Journal of International Economics, Vol. 28, pp. 115-136, 1990.
McKinnon R. I., “Monetary Theory and Controlled Flexibility in the Foreign Exchanges,” Preston, NJ: International Finance section, Princeton U., 1971.
Narayan, P. K., “Are Nominal Exchange Rates and Price Levels Co-integrated? New evidence from threshold autoregressive and momentum-threshold autoregressive models,” Economic Record, Vol. 83, No. 260, pp. 74–85, 2007.
O’Connell, P. G. J., “The Overvaluation of Purchasing Power Parity,” Journal of
International Economics, Vol. 44, No. 1, pp. 1-19, 1998.
Oh, K. Y., “Purchasing Power Parity and Unit Root Tests Using Panel Data,” Journal of International Money and Finance, Vol. 15, No. 3, pp. 405-418, 1996.
Ong, L. L., “Burgernomics: the Economics of the Big Mac Standard,” Journal of International Money and Finance, Vol. 16, No. 6, pp. 865-878, 1997.
Pakko, M. R. and Pollard, P. S., “For Here or to Go? Purchasing Power Parity and the Big Mac,” Review of Federal Reserve Bank of St. Louis, Vol. 78, No. 1, pp. 3-21, 1996.
Papell, D. H., “Searching for Stationarity: Purchasing Power Parity Under the Current Float,” Journal of International Economics, Vol. 43, No. 3-4, pp. 313-332, 1997
Patel, J., “Purchasing Power Parity as Long Run Relations,” Journal of Applied Econometrics, Vol. 5, No. 4, pp. 367-79, 1990.
Prasad, E. and Wei, S. J., “The Chinese Approach to Capital Inﬂows: patterns and possible explanations,” NBER Working Paper No. 11306, 2005.
Rogoff, K., “The Purchasing Power Parity Puzzle,” Journal of Economic Literature, Vol. 34, No. 2, pp. 647-668, 1996.
Samuelson, P., “Theoretical Notes on Trade Problems,” Review of Economics and Statistics, Vol. 46, No. 2, pp. 145-154, 1964.
Wu, J.L. and Wu, S., “Is Purchasing Power Parity Overvalued,” Journal of Money, Credit and Banking, Vol. 33, No. 3, pp. 804–812, 2001.
Yu, T. S., “Can East Asia Rise Again?” Journal of Asian Economics, Vol. 13, No. 6, pp. 715-729, 2003.