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Nonlinear relationship between the real exchange rate and economic fundamentals: Evidence from China and Korea

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  • Tang, Xiaolei
  • Zhou, Jizhong

Abstract

This paper investigates the potential nonlinear relationship between the real exchange rates of two currencies (Chinese Yuan and South Korean Won) and economic fundamentals using quarterly data over the period 1980Q1–2009Q4. We employ the Alternating Conditional Expectation algorithm to test for nonlinearity among the variables of interest. The results show that there does exist a nonlinear cointegrating relationship between the real exchange rates and fundamentals for China and Korea. In contrast with the conventional linear relationship, the elasticity of the real exchange rate with respect to fundamentals varies over time according to the nonlinear relationship.

Suggested Citation

  • Tang, Xiaolei & Zhou, Jizhong, 2013. "Nonlinear relationship between the real exchange rate and economic fundamentals: Evidence from China and Korea," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 304-323.
    • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:304-323
    DOI: 10.1016/j.jimonfin.2012.04.010
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    Cited by:

    1. Suxiao Li & Jakob de Haan & Bert Scholtens, 2018. "Are International Fund Flows Related to Exchange Rate Dynamics?," Open Economies Review, Springer, vol. 29(1), pages 31-48, February.
    2. Irina Dubova, 2016. "Modeling Russia’s exchange rate in the long-run," International Economics and Economic Policy, Springer, vol. 13(3), pages 499-518, July.
    3. Ebrahim Hadian; & Najmeh Sajedianfard, 2018. "Monetary Fundamental-Based Exchange Rate Model in Iran: Applying a MS-TVTP Approach," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(2), pages 557-578, Spring.
    4. Abdul RASHID & Aamir JAVED & Zainab JEHAN & Uzma IQBAL, 2022. "Time-Varying Impacts of Macroeconomic Variables on Stock Market Returns and Volatility : Evidence from Pakistan," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 144-166, October.
    5. Wang, Weiguo & Xue, Jing & Du, Chonghua, 2016. "The Balassa–Samuelson hypothesis in the developed and developing countries revisited," Economics Letters, Elsevier, vol. 146(C), pages 33-38.
    6. Tie‐Ying Liu & Chien‐Chiang Lee, 2022. "Exchange rate fluctuations and interest rate policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3531-3549, July.
    7. Utku Altunoz, 2020. "Determining the Interaction of the International Portfolio Flows with Exchange Rate Volatility in Developing Countries," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 6(1), pages 41-54, June.
    8. R. Gopinathan & S. Raja Sethu Durai, 2019. "Stock market and macroeconomic variables: new evidence from India," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-17, December.

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    More about this item

    Keywords

    Equilibrium exchange rate; Alternating Conditional Expectation algorithm; Linear cointegration; Nonlinear cointegration;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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