Long run real exchange rate overvaluation : Evidence from Asia

Research output: Chapters, Conference Papers, Creative and Literary Works (RGC: 12, 32, 41, 45)12_Chapter in an edited book (Author)peer-review

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Original languageEnglish
Title of host publicationEconomic, Political and Social Issues of Asia
PublisherNova Science Publishers, Inc.
Pages1-28
ISBN (Print)9781611224719
Publication statusPublished - 1 Jan 2011

Abstract

This paper studies the bilateral real exchange rates of 5 East Asian economies vis-à-vis the U.S. dollar and tests whether permanent changes in these real exchange rates can be explained by permanent changes in the relative prices of nontraded-to traded-goods. We find that, with the exception of the South Korean-U.S. real exchange rate, the other 4 real exchange rates are cointegrated with the relative prices of nontraded-to traded-goods. We propose a new measure of real exchange rate misalignment based on this long run relationship, and calculate estimates of misalignment prior to the Asian currency crisis. For all 4 countries, the proposed measure yields protracted and economically significant overvaluations prior to the crisis. By contrast, a PPP-based measure yields the counterintuitive result that the real exchange rates were significantly undervalued prior to the Asian currency crisis.

Citation Format(s)

Long run real exchange rate overvaluation: Evidence from Asia. / Kakkar, Vikas.
Economic, Political and Social Issues of Asia. Nova Science Publishers, Inc., 2011. p. 1-28.

Research output: Chapters, Conference Papers, Creative and Literary Works (RGC: 12, 32, 41, 45)12_Chapter in an edited book (Author)peer-review