EXCHANGE RATE REVERSION UNDER REGIMES OTHER THAN FREE FLOAT

Abstract

Several studies indirectly point out that the exchange rate system may be one of the factors for establishing purchasing power parity (PPP). However, current researches on PPP have mainly focused on the recent floating period and need various statistical models to carry out. We use quantile autoregression technique to comprehensively examine the mean reversion properties of the New Taiwan Dollar (NTD), where the NTD was both in a fixed regime period and a managed floating system period. Empirical findings indicate that NTD showed comparatively faster recovery when subjected to a larger or positive disturbance from the market. Additionally, when NTD was in a fixed regime period, PPP was mostly established. But during the managed floating system period, it was only partially established. These results suggest that mean reversion of real exchange rate heavily depends on the regime effect. Copyright © 2012 John Wiley & Sons, Ltd.