Disorderly adjustments to the misalignments in the Korean won
TL;DR: The authors estimated the equilibrium exchange rates for Korea's real effective rates using Clark and MacDonald's (1999) behavioural equilibrium exchange rate (BEER) approach, which suggests that the real exchange rate was substantially overvalued during the period prior to the currency crisis of 1997-98.
Abstract: This paper estimates the equilibrium exchange rates for Korea's real effective rates using Clark and MacDonald's (1999) behavioural equilibrium exchange rate (BEER) approach. The estimation result suggests that the real exchange rate was substantially overvalued during the period prior to the currency crisis of 1997-98. The subsequent adjustment, however, was disorderly in the sense that the real exchange rate overshot its long-run equilibrium value. There was also a large deviation from the BEER, indicating that the sharp depreciation was not an equilibrium phenomenon.
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TL;DR: The following sections are included:IntroductionReview of BEER ApproachEconometric Methodology and ResultsExchange Rate Regimes and Undervaluation ConclusionAppendix and Appendix.
Abstract: The following sections are included:IntroductionReview of BEER ApproachEconometric Methodology and ResultsExchange Rate Regimes and UndervaluationConclusionAppendixReferences
1 citations
01 Jan 2014
TL;DR: In this paper, the authors investigated the impact of real exchange rate misalignment on economic growth in 63 developing countries over the period 1970-2007, and concluded that misalignments of the RER, in either direction from the level consistent with external and internal equilibrium reduces economic growth.
Abstract: This thesis consists of three self-contained papers, which contribute to the debates surrounding global imbalances and financial globalization. The papers are unified by their featuring of foreign assets and real exchange rates (RERs) as the central themes. Following the introductory chapter, the first paper revisits the growth impact of RER distortions. The Washington Consensus emphasizes the economic costs of RER misalignment. However, a sizable recent empirical literature finds that undervalued RERs help countries achieve faster economic growth. The study shows that these findings are driven by inappropriate homogeneity assumptions imposed on long-run RER behavior across countries and/ or misspecification of the gro,,vth equation. When these problems are redressed, the empirical results for a sample of 63 developing countries over the period 1970-2007 suggest that misalignment of the RER, in either direction from the level consistent with external and internal equilibrium reduces economic growth. However, deviations from Balassa-Samuelson adjusted purchasing power parity do not seem to affect growth. The RER should thus be consistent with external and internal balance, irrespective of the purchasing power parity benchmark. The second paper is motivated by the popular view that the surge in China's foreign exchange reserves is due to a distortionary exchange rate policy ain1ed at keeping the RER w1dervalued in order to support exportled growth. It undertakes an in-depth empirical investigation to quantify how 1nuch "mercantilist" and "precautionary'' 1notives have contributed to the reserve build-up in China during the period 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study -shows, however, that the distinction between the two approaches is im-_ material in China's case. The results suggest that mercantilism accounts for less than 10 percent of the reserye accunTulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China's international reserves. The third paper studies the macroeconomic impact of valuation effects ( chap.ges in net external assets of a country arising fro:n::t movements in exchan.ge rates or asset retur~s). In theory, valuation effects are an important . lX
1 citations
15 Oct 2019
TL;DR: In this paper, the authors determined that the most important determinant of long-term equilibrium real effective exchange rate is relative productivity and changes in the net foreign asset stock also have significant effects.
Abstract: In this study, it was aimed to determine the long-run equilibrium exchange rates and misalignments for 15 developing countries with current account deficit in the period of 1995-2016 by using BEER (Behavioral Balance Exchange Rate) approach. As a result of the applied panel data analysis, it was determined that the most important determinant of long-term equilibrium real effective exchange rate is relative productivity. In addition, changes in the net foreign asset stock also have significant effects. The obtained long-run equilibrium real exchange rates showed that the misalignments from the equilibrium level differed significantly from period to period and according to country due to the national and international economic developments. Accordingly, the 2008 global crisis has had significant effects on real effective exchange rates. In India, Poland, Croatia and Lithuania, the misalignments of the real effective exchange rate from the long-run equilibrium level was low compared to other countries, but it was found to be high in South Africa, Egypt, Ghana, Colombia, Uruguay, Bulgaria and Tunisia. The results obtained for Turkey show that the trend of real effective exchange rate is a precursor of crises. It was determined that the real effective exchange rate was overvalued than the equilibrium level due to the developments in both domestic and global scale from 2003 to 2009 when the effects of the global crisis were felt, but it has depreciated due to the developments in the following period beginning from 2011.
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TL;DR: In this article , the authors examined the long-run determinants of real exchange rates associated with the behavioral equilibrium exchange rate (BEER) approach and identified currency misalignments in these countries.
Abstract: This paper investigates the extent to which domestic and foreign money balances in emerging European countries are influenced by foreign exchange considerations. A well-specified and stable relationship between real money demand and the exchange rate can be perceived as an important part of a successful monetary policy. This study examines the long-run determinants of real exchange rates (RERs) associated with the behavioral equilibrium exchange rate (BEER) approach and identifies currency misalignments in these countries. The misalignment is later used to test the nonlinear behavior of the demand for money. The results indicate that the RER misalignments have a significant impact on domestic money demand. When the currencies are overvalued, there is a reduction in domestic money demand, and when they are undervalued, there is an increase in domestic money demand. Furthermore, it can be concluded that overvaluation causes an increase in foreign money demand indicating a shift of preference from domestic to foreign currency.
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TL;DR: In this paper, the authors attempted to estimate the quarterly equilibrium exchange rates (EER) of nine Asian currencies (Japan, China, Korea, Hong Kong, Singapore, Thailand, Indonesia, Malaysia, and Philippines) with the Behavioral Equilibrium Exchange Rates (BEER) from 2006 to 2014.
Abstract: This paper attempts to estimate the quarterly equilibrium exchange rates (EER) of nine Asian currencies (Japan, China, Korea, Hong Kong, Singapore, Thailand, Indonesia, Malaysia, and Philippines) with the Behavioral Equilibrium Exchange Rates (BEER) from 2006 to 2014. The BEER was compared with the Fundamental Equilibrium Exchange Rates (FEER) published biannually by the Peterson Institute for International Economics. While four Asian currencies tend to be undervalued in the Peterson's FEER approach, the assessment of Asian currencies changed over time in this paper's BEER approach, which captures the Crowther's theory about the development of balance of payments over the long term. Results imply that the BEER approach is imperative for the assessment of Asian currencies, while the equilibrium level of BEER is sometimes sensible for the change of a sample period. Lessons from the results indicate that the EER of countries that shift to a more matured stage, such as Japan and emerging Asia, needs to be frequently assessed by a multi-method so that policy makers can implement appropriate coordination of exchange rate policies for the integration of Asian economies.
Cites background from "Disorderly adjustments to the misal..."
...Moreover, Kinkyo (2008), Lim (2000), MacDonald (2004), and Sahminan (2005) estimated the EERs of Korea, Thailand, Singapore, and Indonesia, respectively....
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References
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TL;DR: The purchasing power parity (HIE) doctrine has had its ebbs and flows I over the years as mentioned in this paper and it has also had its critics, among others Taussig after World War J4 and Haberler after WWIJ,5 but it has managed to survive nevertheless.
Abstract: 5_HIE purchasing-power parity doctrine has had its ebbs and flows I over the years. Interest in the doctrine arose whenever existing exchange rates were considered unrealistic and the search began for the elusive concept of equilibrium rates. It was first invokedalthough in somewhat ambiguous terms -in the period of the Napoleonic wars,' it received its christening at the hands of Gustav Cassel during World War I,2 and it was resurrected after World War II.3 It has also had its critics, among others Taussig after World War J4 and Haberler after World War IJ,5 but it has managed to survive nevertheless. In recent years, new efforts have been made to clothe the purchasing-power parity doctrine in the garments of respectability, and a proposal has also been put forward to use this doctrine as a guide in establishing equilibrium exchange rates.6 At the same time, new
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2,393 citations
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TL;DR: This paper developed an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices.
Abstract: We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models Our analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies
1,763 citations
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01 Jan 1994
TL;DR: This paper developed an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices.
Abstract: We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices. The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models. Our analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies.
1,572 citations
TL;DR: In this paper, a convenient version of the omnibus test for normality, using skewness and kurtosis based on Shenton and Bowman [Journal of the American Statistical Association (1977) Vol. 72, pp. 206 and 211], was proposed.
Abstract: We suggest a convenient version of the omnibus test for normality, using skewness and kurtosis based on Shenton and Bowman [Journal of the American Statistical Association (1977) Vol. 72, pp. 206–211], which controls well for size, for samples as low as 10 observations. A multivariate version is introduced. Size and power are investigated in comparison with four other tests for multivariate normality. The first power experiments consider the whole skewness–kurtosis plane; the second use a bivariate distribution which has normal marginals. It is concluded that the proposed test has the best size and power properties of the tests considered.
912 citations