[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v19y2010i3p205-213.html
   My bibliography  Save this article

Real exchange rate behavior and optimum currency area in East Asia: Evidence from Generalized Purchasing Power Parity

Author

Listed:
  • Mishra, Ritesh Kumar
  • Sharma, Chandan
Abstract
In the aftermath of the Asian financial crisis, the need for monetary and exchange rate cooperation among the Asian countries has increased considerably. In this context, we attempt to evaluate the potential of an optimum currency area (OCA) for a group of eight East Asian countries. For this purpose, this study tests Purchasing Power Parity (PPP) and Generalized PPP (GPPP) hypothesis, which provides stylized facts of real exchange rate. Specifically, we attempt to investigate the symmetry in macroeconomic disturbances and the co-movements of bilateral real exchange rates of the East Asian countries as one of the standard minimum precondition for forming an OCA. Contrary to many previous studies, we find some supportive evidence for GPPP which, in turn, provides support for the feasibility of an optimum currency area in East Asia. However, the presence of asymmetries in the process, through which countries adjust to shocks in the system, indicates that still higher level of economic integration is required to strengthen the case of a currency union. More importantly, our overall results appear to be invariant to the choice of a base currency and therefore it provides support to the argument that both US dollar and Japanese Yen are important for East Asia while considering the case of a currency union.

Suggested Citation

  • Mishra, Ritesh Kumar & Sharma, Chandan, 2010. "Real exchange rate behavior and optimum currency area in East Asia: Evidence from Generalized Purchasing Power Parity," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 205-213, June.
    • Handle: RePEc:eee:finana:v:19:y:2010:i:3:p:205-213
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057-5219(10)00022-0
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters, in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88, National Bureau of Economic Research, Inc.
    3. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    5. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
    6. Swofford, James L., 2008. "Tests of microeconomic foundations of Asian common currency areas," Journal of Asian Economics, Elsevier, vol. 19(3), pages 254-258, June.
    7. Enders, Walter & Hurn, Stan, 1994. "Theory and Tests of Generalized Purchasing-Power Parity: Common Trends and Real Exchange Rates in the Pacific Rim," Review of International Economics, Wiley Blackwell, vol. 2(2), pages 179-190, June.
    8. Lucio Sarno, 1997. "Policy convergence, the exchange rate mechanism and the misalignment of exchange rates. Some tests of purchasing power parity and generalized purchasing power parity," Applied Economics, Taylor & Francis Journals, vol. 29(5), pages 591-605.
    9. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    10. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
    11. Grace H.Y. Lee & M. Azali, 2009. "Optimum Currency Areas in East Asia: A Structural VAR Approach," Monash Economics Working Papers 19-09, Monash University, Department of Economics.
    12. Tamim Bayoumi & Paolo Mauro, 2001. "The Suitability of ASEAN for a Regional Currency Arrangement," The World Economy, Wiley Blackwell, vol. 24(7), pages 933-954, July.
    13. Zhaoyong Zhang & Kiyotaka Sato & Michael McAleer, 2004. "Is a monetary union feasible for East Asia?," Applied Economics, Taylor & Francis Journals, vol. 36(10), pages 1031-1043.
    14. Junichi Goto & Koichi Hamada, 1994. "Economic Preconditions for Asian Regional Integration," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, pages 359-388, National Bureau of Economic Research, Inc.
    15. Peter Wilson & Keen Meng Choy, 2007. "Prospects for enhanced exchange rate cooperation in East Asia: some preliminary findings from generalized PPP theory," Applied Economics, Taylor & Francis Journals, vol. 39(8), pages 981-995.
    16. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
    17. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, pages 295-333, National Bureau of Economic Research, Inc.
    18. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 331-350, September.
    19. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
    20. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    21. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
    22. R. I. McKinnon, 2000. "The East Asian Dollar Standard, Life After Death?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(1), pages 31-82, February.
    23. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    24. repec:bla:obuest:v:61:y:1999:i:0:p:653-70 is not listed on IDEAS
    25. Grace H.Y. Lee & M. Azali, 2009. "A Bayesian Approach to Optimum Currency Areas in East Asia," Monash Economics Working Papers 18-09, Monash University, Department of Economics.
    26. Kwan, C. H., 1998. "The theory of optimum currency areas and the possibility of forming a yen bloc in Asia," Journal of Asian Economics, Elsevier, vol. 9(4), pages 555-580.
    27. Mundell, Robert, 2003. "Prospects for an Asian currency area," Journal of Asian Economics, Elsevier, vol. 14(1), pages 1-10, February.
    28. Kim, Bong-Han & Kim, Hong-Kee & Oh, Keun-Yeob, 2009. "The purchasing power parity of Southeast Asian currencies: A time-varying coefficient approach," Economic Modelling, Elsevier, vol. 26(1), pages 96-106, January.
    29. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
    30. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    31. Mohsen Bahmani‐Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less‐Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.
    32. Taufiq Choudhry, 2005. "Asian Currency Crisis and the Generalized PPP: Evidence from the Far East," Asian Economic Journal, East Asian Economic Association, vol. 19(2), pages 137-157, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Oladunjoye Opeyemi Nathaniel, 2019. "Validity of Purchasing Power Parity (PPP) Hypothesis in the Ecowas (1980–2017)," Emerging Economy Studies, International Management Institute, vol. 5(2), pages 141-156, November.
    2. de Truchis, Gilles & Keddad, Benjamin, 2013. "Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 394-412.
    3. Shafighi, Najla & Gharleghi, Behrooz, 2016. "Feasibility of a currency union in East Asia using the five-variable structural vector autoregressive model," Economic Analysis and Policy, Elsevier, vol. 52(C), pages 45-54.
    4. Richard Gardiner & Petr Hajek, 2020. "Interactions among energy consumption, CO2, and economic development in European Union countries," Sustainable Development, John Wiley & Sons, Ltd., vol. 28(4), pages 723-740, July.
    5. Kawasaki, Kentaro & Sato, Kiyotaka, 2021. "A new assessment of economic integration in East Asia: Application of an industry-specific G-PPP model," Japan and the World Economy, Elsevier, vol. 60(C).
    6. Al-Khazali, Osamah M. & Leduc, Guillaume & Pyun, Chong Soo, 2011. "Market efficiency of floating exchange rate systems: Some evidence from Pacific-Asian countries," Global Finance Journal, Elsevier, vol. 22(2), pages 154-168.
    7. repec:zbw:bofrdp:2016_020 is not listed on IDEAS
    8. Ephrem Habtemichael Redda & Paul-Francois Muzindutsi, 2021. "Monetary Union Feasibility in the East African Community: Evidence from GPPP," International Journal of Economics and Financial Issues, Econjournals, vol. 11(6), pages 9-16.
    9. EPHREM HABTEMICHAEL REDDA & Paul-Francious Muzindusti, 2017. "Does SADC constitute an optimum currency area? Evidence from generalised purchasing power parity," Proceedings of Economics and Finance Conferences 4807771, International Institute of Social and Economic Sciences.
    10. Mervan Selçuk & Şakir Görmüş, 2022. "Is a Monetary Union Feasible for D-8 Countries? An Examination in The Framework of The Optimum Currency Area," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 9(1), pages 75-101, January.
    11. Azzam, Islam & El-Masry, Ahmed A. & Yamani, Ehab, 2023. "Foreign exchange market efficiency during COVID-19 pandemic," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 717-730.
    12. Caporale, Guglielmo Maria & Gil-Alana, Luis A. & You, Kefei, 2018. "Exchange rate linkages between the ASEAN currencies, the US dollar and the Chinese RMB," Research in International Business and Finance, Elsevier, vol. 44(C), pages 227-238.
    13. Fegheh Majidi , Ali, 2014. "Currency Union and Bilateral Trade: Evidence from OIC Countries," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 9(2), pages 140-166, October.
    14. Caporale, Guglielmo Maria & Gil-Alana, Luis A. & You, Kefei, 2018. "Exchange rate linkages between the ASEAN currencies, the US dollar and the Chinese RMB," Research in International Business and Finance, Elsevier, vol. 44(C), pages 227-238.
    15. Makoto Muto & Yoshitaka Saiki, 2020. "Synchronization analysis between exchange rates on the basis of purchasing power parity using the Hilbert transform," Papers 2010.08825, arXiv.org, revised Aug 2022.
    16. Ma, Wei & Li, Haiqi & Park, Sung Y., 2017. "Empirical conditional quantile test for purchasing power parity: Evidence from East Asian countries," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 211-222.
    17. Chen, Xiaofen, 2012. "The dampening effect of bank foreign liabilities on monetary policy: Revisiting monetary cooperation in East Asia," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 412-427.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. H. Levent Korap & Ozgur Aslan, 2010. "Re-examination of the long-run purchasing power parity: further evidence from Turkey," Applied Economics, Taylor & Francis Journals, vol. 42(27), pages 3559-3564.
    2. de Truchis, Gilles & Keddad, Benjamin, 2013. "Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 394-412.
    3. Kamrul Hassan & Ruhul Salim, 2011. "The linkage between relative population growth and purchasing power parity," International Journal of Development Issues, Emerald Group Publishing Limited, vol. 10(2), pages 154-169, July.
    4. Miguel Carvalho & Paulo Júlio, 2012. "Digging out the PPP hypothesis: an integrated empirical coverage," Empirical Economics, Springer, vol. 42(3), pages 713-744, June.
    5. Shirono, Kazuko, 2008. "Real effects of common currencies in East Asia," Journal of Asian Economics, Elsevier, vol. 19(3), pages 199-212, June.
    6. Baharumshah, Ahmad Zubaidi & Onwuka, Kevin Odulukwe & Habibullah, Muzafar Shah, 2007. "Is a regional trade bloc a prelude to multilateral trade liberalization?: Empirical evidence from the ASEAN-5 economies," Journal of Asian Economics, Elsevier, vol. 18(2), pages 384-402, April.
    7. Yuan, Chunming, 2011. "The exchange rate and macroeconomic determinants: Time-varying transitional dynamics," The North American Journal of Economics and Finance, Elsevier, vol. 22(2), pages 197-220, August.
    8. Ritesh Kumar Mishra & Sanjay Sehgal, 2011. "Exchange rates and prices in purchasing power parity framework: Are bilateral real exchange rates stationary?," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 4(3), pages 274-286.
    9. Abdulnasser, Hatemi-J, 2011. "Hidden panel cointegration," MPRA Paper 31604, University Library of Munich, Germany.
    10. Peter B. Kenen & Ellen E. Meade, 2006. "Monetary integration in East Asia," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    11. Hanck, Christoph, 2006. "Mixed Signals Among Panel Cointegration Tests," Technical Reports 2006,45, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
    12. Kentaro Kawasaki & Zhi-Qian Wang, 2015. "Is Economic Development Promoting Monetary Integration in East Asia?," IJFS, MDPI, vol. 3(4), pages 1-31, October.
    13. Gulasekaran Rajaguru & Ahmed M Khalid & Francesco Barbera, 2014. "It’s not yen, euro or koala bloc: Greenback is still dominant in East Asia," Australian Journal of Management, Australian School of Business, vol. 39(4), pages 549-571, November.
    14. Fakhri J. Hasanov & Moayad H. Al Rasasi & Salah S. Alsayaary & Ziyadh Alfawzan, 2022. "Money demand under a fixed exchange rate regime: the case of Saudi Arabia," Journal of Applied Economics, Taylor & Francis Journals, vol. 25(1), pages 385-411, December.
    15. Mohsen Bahmani‐Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less‐Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.
    16. Apergis, Nicholas & Dincer, Oguzhan C. & Payne, James E., 2012. "Live free or bribe: On the causal dynamics between economic freedom and corruption in U.S. states," European Journal of Political Economy, Elsevier, vol. 28(2), pages 215-226.
    17. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity For Developing And Developed Countries. What Can We Learn From Non‐Stationary Panel Data Models?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 752-773, September.
    18. Daniele Antonucci & Alessandro Girardi, 2005. "Structural changes and deviations from the PPP within the Euro Area," ISAE Working Papers 57, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    19. Brissimis, Sophocles N. & Sideris, Dimitris A. & Voumvaki, Fragiska K., 2005. "Testing long-run purchasing power parity under exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 959-981, October.
    20. Kwack, Sung Y., 2005. "Exchange rate and monetary regime options for regional cooperation in East Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 57-75, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:19:y:2010:i:3:p:205-213. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.