ON SINGAPORE DOLLAR–U.S. DOLLAR AND PURCHASING POWER PARITY

Venus Liew, Ahmad Zubaidi Baharumshah () and Kian-Ping Lim

The Singapore Economic Review (SER), 2004, vol. 49, issue 01, 71-84

Abstract: This study re-examines the validity of the relationship between the Singapore dollar–U.S. dollar exchange rate and relative prices using the latest econometric methodologies that account for non-linearity. Among others, this study finds Exponential Smooth Transition Autoregressive (ESTAR)-type non-linear mean-reverting adjustment process of the nominal Singapore dollar–U.S. dollar rate towards the consumer price index ratio. Unlike previous findings of a linear cointegration relationship between the nominal Singapore dollar–U.S. dollar exchange rate and consumer price index ratio, this study shows that the relationship is in fact non-linear in nature. The major economic implications of our findings are: (1) policy makers need to take non-linearity into consideration in their policy decisions; (2) the Monetary Authority of Singapore (MAS) is able to maintain the macroeconomic equilibrium despite the authority's strong dollar policy; and (3) one should keep track of Singapore's monetary policy and other innovations in aggregate demand in order to closely monitor the movement of the Singapore exchange rate.

Keywords: Exchange rates; Non-linearity; Purchasing power parity; Exponential smooth transition autoregressive (ESTAR) model; Singapore (search for similar items in EconPapers)
Date: 2004
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Working Paper: On Singaporean Dollar-U.S. Dollar and Purchasing Power Parity (2004)
Working Paper: On Singaporean Dollar-U.S. Dollar and Purchasing Power Parity (2004)
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DOI: 10.1142/S0217590804000809

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