Time-varying Cointegration Models and Exchange Rate Predictability in Korea

Soo Kyung Park and Choel Beom Park

KDI Journal of Economic Policy, 2015, vol. 37, issue 4, 1-20

Abstract: We examine the validity of popular exchange rate models such as the purchasing power parity (PPP) hypothesis and the monetary model for Korean won/US dollar exchange rate. Various specification tests demonstrate that Korean data are more favorable for both models based on time-varying cointegration coefficients as compared to those based on constant cointegration coefficients. When the abilities to predict future exchange rates between those models based on timevarying cointegration coefficients are compared, an in-sample analysis shows that the time-varying PPP (monetary model) has better predictive power over horizons shorter (longer) than one year. Results from an out-of-sample analysis indicate that the time-varying PPP outperforms models based on constant cointegration coefficients when predicting future exchange rate changes in the long run.

Keywords: Exchange rate; Monetary model; Predictability; Purchasing power parity; Timevarying cointegration (search for similar items in EconPapers)
JEL-codes: F37 F41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/200777/1/kdi-jep-37-4-1.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:kdijep:v:37:y:2015:i:4:p:1-20

DOI: 10.23895/kdijep.2015.37.4.1

Access Statistics for this article

KDI Journal of Economic Policy is currently edited by Dongseok Kim

More articles in KDI Journal of Economic Policy from Korea Development Institute (KDI) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().