NON-LINEAR ADJUSTMENT PROCESS IN WON/DOLLAR AND WON/YEN REAL EXCHAGE RATES

Kyttack Hong () and Dong-Hwan Oh
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Kyttack Hong: Department of Economics, Chung-Ang University
Dong-Hwan Oh: Department of Economics, Chung-Ang University

Journal of Economic Development, 2009, vol. 34, issue 2, 111-130

Abstract: We examine the purchasing power parity (PPP) hypothesis in won/dollar and won/yen real exchange rates using a non-linear framework. Many empirical studies based on the linear framework have failed to find clear supporting evidence for the validity of PPP hypothesis. We test the PPP hypothesis using a two-stage procedure suggested by Engle and Granger (1987), and show that it fails to reject non-cointegration. Evaluating the linear model against the nonlinear STAR model, we find that linearity is clearly rejected, but ESTAR process is accepted. Moreover, the parameter estimates of the ESTAR model establish a certain pattern of random walk behavior for small deviations and of fast adjustment for large deviations, thus providing strong evidence for mean-reverting behavior in real won/dollar and won/yen exchange rates.

Keywords: Purchasing Power Parity; Non-linear Adjustment Process; ESTAR Model (search for similar items in EconPapers)
JEL-codes: C52 F31 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:jed:journl:v:34:y:2009:i:2:p:111-130

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