Sectoral Real Exchange Rates Research Articles

Sectoral Real Exchange Rates and Manufacturing Exports: A Case Study of Latin America

Sectoral Real Exchange Rates and Manufacturing Exports: A Case Study of Latin America

Sectoral Price Divergence between Korea and Japan

(ProQuest: ... denotes formulae omitted.)I.INTRODUCTIONKorea and Japan have been closely linked not only economically but also in many aspects. For example, Japan has been one of the major trading partners of Korea and the volume of trade between the two countries has significantly increased since the development of the Korean economy. Further, there has been a structural transformation in the Korean economy: Korea's capital markets have been extensively integrated to the international financial markets and Korea significantly opened its product markets to the world since the Asian financial crisis in 1997-98 so that the ratios of Korean export and import to its GDP are around 50% as of 2015, respectively. Although all these events point to the direction in favor of a closer integration of product markets, this paper empirically investigates the degree of product market integration between Korea and Japan using a measure of sectoral relative consumer price persistence over the period of 1985-2016. In particular, we examine if sectoral relative prices between the two countries converted with the common currency contain a stochastic trend or converge to their equilibrium value in the long run.We apply a new econometric method for testing the unit root hypothesis of real exchange rates: we use the panel unit root test in the presence of cross-section dependence developed by Pesaran (2007). His method is to augment the crosssectional averages of lagged levels and first-differences of the individual series in the standard augmented Dickey-Fuller (ADF) regressions to control for crosssection dependence. The use of Pesaran's method has two advantages compared to previous studies.One advantage is that the method obtains an additional cross-sectional power using panel data and mitigates the well-known shortcoming of univariate unit root tests in terms of their power properties.1 The other advantage is that the method takes into account of cross-section dependence frequently presented in panel data sets. In particular, panels with sectoral real exchange rates are likely exhibit high crosssection dependence since they are constructed using a common nominal exchange rate. The well-known panel unit root tests such as the LLC test developed by Levin et al. (2002), the IPS test by Im et al. (2003), and the Maddala-Wu test by Maddala and Wu (1999) assume that individual time series in the panel are independently distributed across cross-sections. However, O'Connell (1998) shows that the typical panel unit root tests developed under the cross-sectional independence assumption reject too often the unit root hypothesis in the presence of significant cross-section dependence. Further, recent econometric studies show that the method of demeaning the individual series cross-sectionally does not effectively mitigate the problem of cross-section dependence in a general setting. Pesaran's method overcomes this deficiency of the previous tests. Pesaran (2007) also confirms O'Connell (1998)'s finding applying the new econometric method: he examines if the CPI-based real exchange rates constructed using quarterly consumer price indices of 17 OECD countries contain a stochastic trend for the periods of 1974Q1-1998Q4 and 1988Q1-1998Q4, and finds that the IPS test rejects the unit root hypothesis for both cases, while his test developed under the assumption of cross-section dependence does not reject it. He also shows that these opposite results are mainly due to the significant cross-section dependence in those panels. As formally and informally discussed in Section III and IV, the error term of the regression for our panel of sectoral real exchange rates exhibits significant cross-section dependence. Therefore, the use of Pesaran (2007)'s method is appropriate for our study.We find that sectoral relative prices between Korea and Japan do not revert to their equilibrium value in the long run applying Pesaran (2007)'s panel unit root test. …

Sectoral Price Divergence between Korea and Japan

This paper examines the persistent properties of 12 sectoral relative prices between Korea and Japan obtained following the Classification of Individual Consumption according to Purpose (COICOP) over the period of 1985-2016. Applying a new econometric method developed by Pesaran which controls for the cross-section dependence in a panel, we are not able to reject the hypothesis that the sectoral real exchange rates contain a common stochastic trend. On the other hand, the well-known panel unit root tests such as the IPS and LLC tests widely used by previous studies strongly reject the unit root hypothesis. Since the error term of the regression for our panel exhibits significant cross-section dependence, these opposite results justify that the use of the new econometric method is appropriate.

HALF-LIFE DEVIATIONS FROM PURCHASING POWER PARITY: EVIDENCE FROM PACIFIC RIM COUNTRIES

The study examines the half-life deviations from purchasing power parity (PPP) using both linear and nonlinear models for the sector specific real exchange rates of the Pacific Rim countries. By using a linear benchmark model, the estimated half-life deviations from PPP of about/or less than 3 years seemingly solve the PPP puzzle. After re-examining them using nonlinear forms, the PPP puzzle for most sectoral real exchange rates in the study still remains. More specifically, we find that deviations from PPP by TAR are persistent and take much more time for mean reversions especially for non-tradable sectors using logistic STAR / exponential STAR (LSTAR/ESTAR). The major reasons might be that conventional studies have failed to control the possible nonlinearity of real exchange rates, and have disregarded the possible bias of any single numèraire country. Finally, we also show the speed of mean reversion for real exchange rates by sectoral prices (tradable and non-tradable).

The Behaviour of Real Exchange Rates: The Case of Japan

AbstractThis study examines the convergence rate of mean reversion by estimating the half‐lives of sectoral real exchange rates using an extensive product price panel for Japan (with the USA as the numéraire). We find that the half‐lives of sectoral real exchange rates are remarkably distorted when the grouped half‐life is measured inappropriately and the cross‐sectional dependence and potential trend breaks are ignored. After taking account of these problems, the bias‐corrected half‐life for all goods is as low as 3.00 years, close to the bottom of the consensus view of 3 to 5 years. Moreover, the bias‐corrected half‐life of mean reversion is 2.40 years for traded goods, and only approximately half that for non‐traded goods. Finally, our findings also support the view that small‐sample bias correction is critical for half‐life estimations.

Aggregation and the PPP Puzzle in a Sticky-Price Model

We study the purchasing power parity (PPP) puzzle in a multisector, two-country, sticky-price model. Sectors differ in the extent of price stickiness, leading to heterogeneous sectoral real exchange rate dynamics. Deviations from PPP are more volatile and persistent than in an otherwise identical one-sector world economy with the same average frequency of price changes. Under the empirical distribution of price stickiness of the US economy, the model produces PPP deviations with a half-life of 39 months. We provide a structural interpretation of the approaches found in the empirical literature on aggregation and PPP, and reconcile its apparently conflicting findings. (JEL F31, G31)

Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

Using a threshold autoregressive model, we con…rm the presence of nonlinearities in sectoral real exchange rate (SRER) dynamics across Mexico, Canada and the US in the pre-NAFTA and post-NAFTA periods. Measuring transaction costs using the estimated threshold bands, we …nd evidence that Mexico still faces higher transaction costs than their developed counterparts. Trade liberalization is associated with re

Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

Using a threshold autoregressive model, we confirm the presence of nonlinearities in sectoral real exchange rate (SRER) dynamics across Mexico, Canada and the US in the pre-NAFTA and post-NAFTA periods. Measuring transaction costs using the estimated threshold bands, we find evidence that Mexico still faces higher transaction costs than their developed counterparts. Trade liberalization is associated with reduced transaction costs and lower relative price differentials among countries. Other determinants of transaction costs are distance and nominal exchange rate volatility. Our results show that the half-lives of SRERs shocks, calculated by Monte Carlo integration, imply much faster adjustment in the post-NAFTA period.

Aggregation and the PPP Puzzle in a Sticky-Price Model

We study the purchasing power parity (PPP) puzzle in a multi-sector, two-country, sticky-price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. We show analytically that in this economy, deviations of the real exchange rate from are more volatile and persistent than in a counterfactual one-sector world economy that features the same average frequency of price changes, and is otherwise identical to the multi-sector world economy. When simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy, the model produces a half-life of deviations from of 39 months. In contrast, the half-life of such deviations in the counterfactual one-sector economy is only slightly above one year. As a by-product, our model provides a decomposition of this difference in persistence that allows a structural interpretation of the different approaches found in the empirical literature on aggregation and the real exchange rate. In particular, we reconcile the apparently conflicting findings that gave rise to the PPP Strikes Back debate (Imbs et al. 2005a,b and Chen and Engel 2005).

Threshold Adjustment of Deviations from the Law of One Price

Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We find strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rate shocks, calculated by Monte Carlo integration, imply much faster adjustment than the 'consensus' half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries.

Mexico'S Integration Into Nafta Markets: A View From Sectoral Real Exchange Rates and Transaction Costs

"Volume 2008 (2008): Issue 123 (May 2008): Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates and Transaction Costs" published on 01 May 2008 by International Monetary Fund.

Mexico's Integration into Nafta Markets: A View from Sectoral Real Exchange Rates and Transaction Costs

A self-exciting threshold autoregressive model is used to measure transaction costs that may explain relative price differentials and nonlinearities in the behavior of sectoral real exchange rates across Mexico, Canada and the U.S. Interpreting price threshold bands as transactions costs, we find evidence that Mexico still face higher transaction costs than their developed counterparts, even though trade liberalization lowers relative price differentials between countries. The distance between countries and nominal exchange rate volatility are found to be determinants of transaction costs that limit price convergence. Other factors - including weak domestic competition and transportation - are also likely to be important.

Mexico's Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

Mexico's Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

Threshold Adjustment in Deviations from the Law of One Price

Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We and strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rates shocks, calculated by Monte Carlo integration, imply much faster adjustment than the consensus half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries.

Market structure and the persistence of sectoral real exchange rates

AbstractWe examine the relationship between market structure and the persistence of US dollar‐based sectoral real exchange rates for 14 OECD countries. Our empirical results based on disaggregated data suggest that differences in market structure significantly determine the rates at which deviations from sectoral purchasing power parity decay. Specifically, industries with a larger price‐cost margin are found to exhibit slower parity reversion of their sectoral real exchange rates. Further, as the degree of intra‐industry trade activity increases, sectoral real exchange rate persistence becomes more pronounced. These findings suggest that an imperfectly competitive market structure contributes to the well‐documented persistence in real exchange rates. Copyright © 2001 John Wiley & Sons, Ltd.

Systematic movements in real exchange rates in the G-5: Evidence on the integration of internal and external markets

Many recent studies have documented the random behavior of real exchange rates. This paper shows that real exchange rates defined for different sectors of an economy move closely together with one another even though each of the sectoral real exchange rates taken alone has a large random component. The sectoral real exchange rates are tied together by internal price links due to factor mobility within each national economy. Any differences between real exchange rates which develop, moreover, can be explained almost entirely by productivity differentials, at least in the long run. This paper contrasts the strong ties which bind together prices from different sectors internally with ties that bind the prices of goods from the same sector internationally. Prices are shown to be much more highly correlated internally than externally because flexible exchange rates disrupt normal pricing relationships between goods from different countries.