Abstract
Whether an undervalued currency is an attainable industrial policy for developing countries? sustained development has recently invoked many discussions. This paper studies the case of Taiwan after first determining the misalignment of Taiwan?s currency by estimating the fundamental equilibrium real exchange rate. Three sub-periods for Taiwan?s currency exchange rate misalignment are identified: undervaluation in the periods 1981-1986 and 1998- 2008 and overvaluation during 1987-1997. Second, we use a vector autoregression (VAR) model to examine the Granger causality between exchange rate misalignment and GDP, by incorporating export and investment variables. The evidence shows that exchange rate misalignment does Granger cause GDP and it mainly comes from the third sub-period when the Taiwan dollar was undervalued. From past experience and the current economic doldrums of the last resort of global exports - the United States - currency undervaluation is not a validated strategy upon which emerging markets can wishfully impinge.
Highlights
Instead of using theories of exchange rate determination, such as those methods based on the purchasing power parity or monetary approach, we estimate the fundamental equilibrium real exchange rate (FEER), which is determined by fundamental macroeconomic factors, as suggested by Sebastian Edwards (1989), Clark and MacDonald (1999), and IMF (2006a), among others
Variant empirical studies have supported this argument, such as Rodrik (2008) and Freund and Pierola (2008), but most of them focus on the estimation of cross country data mixed with time series data
In this paper we study Taiwan’s case by using the fundamental equilibrium real exchange rate approach to determine the direction of exchange rate misalignment
Summary
To determine whether a currency is undervalued, we first need to determine what the equilibrium exchange rate is. Instead of using theories of exchange rate determination, such as those methods based on the purchasing power parity or monetary approach, we estimate the fundamental equilibrium real exchange rate (FEER), which is determined by fundamental macroeconomic factors, as suggested by Sebastian Edwards (1989), Clark and MacDonald (1999), and IMF (2006a), among others
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
