The Won-Yen Exchange Rate and Purchasing Power Party During the Recent Float

Jung Sik Kim
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Jung Sik Kim: Yonsei University

Korean Economic Review, 1999, vol. 15, 43-53

Abstract: Recent findings on PPP suggest that the deviation from PPP have not been self correcting between countries with large disparities in rates of inflation. Korea has experienced high inflation rates than Japan during 1980s and 1990s and so, under the current exchange rate system, the won-yen exchange rate may be misaligned. In this paper, we test the long-run PPP hypothesis for the won-yen exchange rate in Korea during 1980-1997, and find that the real exchange rate follows a random walk and there exists no cointegration relationship between the exchange rate and prices. The results show that the PPP hypothesis does not hold for the won-yen exchange rate, and suggest that the PPP condition will not hold for countries which experience large disparities in the rates of inflation.

Keywords: Won-Yen Exchange Rate; PPP (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
Date: 1999
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