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

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  • Zhibai, Zhang

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.

Suggested Citation

  • Zhibai, Zhang, 2012. "A Simple Model and Its Application in the Valuation of Five Asian Real Exchange Rates," MPRA Paper 40953, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40953
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    Cited by:

    1. Zhang, Zhibai & Chen, Langnan, 2014. "A new assessment of the Chinese RMB exchange rate," China Economic Review, Elsevier, vol. 30(C), pages 113-122.
    2. Luke Lin & Chun I. Lee, 2016. "Central Bank Intervention, Exchange Rate Regime and the Purchasing Power Parity," The World Economy, Wiley Blackwell, vol. 39(8), pages 1256-1274, August.

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    More about this item

    Keywords

    Equilibrium exchange rate; Absolute purchasing power parity; Balassa-Samuelson effect; Penn effect;
    All these keywords.

    JEL classification:

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

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