Economic growth and stationarity of real exchange rates: Evidence from some fast-growing Asian countries

The possible implications of economic growth for the trending behavior of real exchange rates are explored. Given that prior studies consider mainly industrial countries, an issue concerns whether parity reversion holds for countries with sharply different growth experiences. For countries undergoing dramatic income growth from a low level, substantial changes in the relative price structure between tradables and nontradables can often occur. An implication is that real exchange rates for these countries are likely afflicted by trend shifts, which should bear on empirical testing for unit-root nonstationarity. This study analyzes the trend stationarity property of dollar-based real exchange rates for several fast-growing Asian countries. Considerable evidence is found to support the trend-shift hypothesis and reject the unit-root hypothesis.