A time series analysis of the real exchange rate movement in Korea

Jin-Ock Kim

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The motivation of this study is to investigate the performance of purchasing power parity (PPP) in the Pacific Rim. The overall impression of the Unit Root and Cointegration Tests is that PPP does not hold in the Pacific Rim;Standard theory suggests that monetary shocks may induce temporary deviations from PPP; given the long-run neutrality of money, these deviations should eventually be eliminated. Real disturbances, on the other hand, are thought to have the ability to induce permanent changes in the real exchange rate. To ascertain the sources of PPP shocks, we have employed Sims' (1980a, 1980b) vector autoregression (VAR) framework;Using a VAR framework, we show that real shocks do not induce deviations from PPP. For the case of the U.S./Korean real exchange rate monetary shocks are associated with changes in the real exchange rate. Perhaps the most important result is that these money shocks cause temporary, but not permanent, changes in the real exchange rate; long-run neutrality cannot be rejected;References. (1) Sims, Christopher A. "Macroeconomic and Reality." Econometrica 48 (January 1980a): 1-48. (2) Sims, Christopher A. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered." American Economic Review 70 (May 1980b): 250-57.

Date: 1990-01-01
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