A Simple Model and Its Application in the Valuation of Five Asian Real Exchange Rates

Zhang Zhibai

MPRA Paper from University Library of Munich, Germany

Abstract: In the current paper, a new and simple currency valuation model called the ratio model is proposed based on the Penn effect (a systematic deviation of the purchasing power parity (PPP)). The ratio model, which reduces the uncertainty of the econometric specification that many other valuation models have, is used to valuate the bilateral real exchange rates (RERs) of five Asian industrial countries and areas, namely, Japan, Korea, Taiwan, Hong Kong, and Singapore, against the United States. In the early 1950s to 2009, the misalignments from the ratio model of four new industrial countries and areas converged, but those from the PPP model did not, implying the competitiveness of the ratio model against the PPP model both in currency valuation and as a RER anchor. In 2010–2011, based on the two models, the yen was overvalued by approximately 30%, whereas the Singapore dollar was undervalued by approximately 20%. However, the conclusions on the other three RERs were not consistent.

Keywords: Equilibrium exchange rate; Absolute purchasing power parity; Balassa-Samuelson effect; Penn effect (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2012-08-28
New Economics Papers: this item is included in nep-opm and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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