scholarly journals A review of the Redux model of exchange rate

2005 ◽  
Vol 48 (3-4) ◽  
pp. 155-170
Author(s):  
Viktorija Bojovic
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Purchasing Power Parity ◽  
Monetary Shocks ◽  
Power Parity ◽  
Open Economy Macroeconomics ◽  
New Open Economy Macroeconomics ◽  
Real Effects ◽  
Long Run ◽  
The Status

The paper gives a brief overview of the current state of exchange rate modeling. First section discusses the status of Mundall-Fleming-Dornbusch model. This model demonstrated undeniable time-tested appeal. However, it needed update as regards to microfundations which was made possible in Redux model. Redux model made a breakthrough as to allow for an explicit welfare analysis as far as policy is concerned. The literature covering new open economy macroeconomics is expanding since 1990s, provoked by seminal paper by Obstfeld and Rogofff, in which authors give their perspective of economy reactions to monetary shocks. Redux model assumes real impact of monetary shocks on consumption, output level and exchange rates, allowing for purchasing power parity and low of one price to hold. Welfare is equally increased both domestically and internationally after positive monetary shock. Consumption increases leading economy towards its optimum, reachable only at perfectly competitive markets. Economy is fully adapted to shock only after one time period. However, monetary shocks could have longer real effects due to accumulated welfare. Money is not neutral in this modei, not even in the long run. The welfare results of the new open economy macroeconomics literature are highly sensitive to the precise denomination of price stickiness and the specification of preferences. For this reason the literature is of only limited interest in policy circles. This new developments in models will encourage further research in the new open economy macroeconomics.

scholarly journals Testing the Harrod Balassa Sameulson Hypothesis: The Case of Pakistan.

2011 ◽  
Vol 50 (4II) ◽  
pp. 379-399 ◽  
Author(s):  
Sunila Jabeen ◽  
Waseem Shahid Malik ◽  
Azad Haider
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Purchasing Power Parity ◽  
Control Variable ◽  
Policy Implications ◽  
Purchasing Power ◽  
Power Parity ◽  
Long Run ◽  
Tradable Sector

For a small open economy of Pakistan, exchange rate is determined through the two alternative theories; the nominal theory of exchange rate named by Purchasing Power Parity (PPP) and the real theory known as Harrod Balassa Sameulson (HBS). According to the requirements of theories, two kinds of real exchange rate have been employed for the yearly data of 1972-2008. As, both of the theories are disputed at the ground of their long run relationship with real exchange rate, therefore, the VAR based Johenson Co-integration approach has been utilised to see the long run relationships. PPP has shown less satisfactory results either in its form of absolute version or relative version. Because, real exchange rate in Pakistan is a non-stationary process by Augmented Dickey Fuller unit-root test, predicting some pushing force behind the non-tradable sector. While favouring the PPP in tradable sector, the ADF and KPSS are indicating the presence of the HBS in Pakistan. On the other hand, the analysis of the HBS through co-integration is showing that relative productivity difference has an opposite relationship with relative non-tradable sector prices and with RER. However, the relationship between relative non-tradable sector prices and RER is much stronger and according to the theory. So, there have been incorporated some demand side and external factors to reduce the mis-specification of the simple HBS model. Therefore, in the extended HBS model, productivity difference, government consumption expenditure, terms of trade and world oil prices are appreciating the RER and money supply (a control variable) is pursuing depreciation in RER. So, these results yield some policy implications for Pakistan which can be useful for developing countries as well. JEL classification: E0, E31, E44 Keywords: Harrod-Balassa-Samuelson, Exchange Rate, Purchasing Power Parity, Pakistan

scholarly journals DOES THE BALASSA–SAMUELSON THEORY EXPLAIN THE LINK BETWEEN RELATIVE POPULATION GROWTH AND PURCHASING POWER PARITY?

2013 ◽  
Vol 58 (01) ◽  
pp. 1350007 ◽  
Author(s):  
A. F. M. KAMRUL HASSAN ◽  
RUHUL SALIM
Keyword(s):  
Exchange Rate ◽  
Population Growth ◽  
Purchasing Power Parity ◽  
Panel Cointegration ◽  
Least Square ◽  
Power Parity ◽  
Relative Population ◽  
Relative Prices ◽  
Stable Relationship ◽  
Long Run

Relative population growth affects relative prices through the so-called Balassa–Samuelson (BS) mechanism and that in turn impacts PPP. This paper empirically investigates the relationship between the PPP exchange rate and relative population growth in a panel of 80 selected countries. Following the BS hypothesis, this paper argues that relative population growth affects nominal wages that impact price levels and thereby impacts PPP. Using panel cointegration and fully modified ordinary least square (FMOLS), the empirical results show that there is a stable relationship between PPP exchange rate and relative population growth in the long run. These empirical findings suggest that population growth have an important role in exchange rate determination through PPP.

Purchasing power parity as a long-term memory process

2015 ◽  
Vol 10 (4) ◽  
pp. 711-725 ◽  
Author(s):  
Mohamed Bilel Triki ◽  
Samir Maktouf
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Empirical Literature ◽  
Long Term Memory ◽  
Purchasing Power ◽  
Power Parity ◽  
Fractional Cointegration ◽  
Content Type ◽  
Long Run ◽  
The Usa

Purpose – The purpose of this paper is to focus on whether the deviations from the cointegrating relationship possess long memory and the fractional cointegration analyses may capture a wider range of mean-reversion behaviour than standard cointegration analyses. Design/methodology/approach – This paper uses a fractional cointegration technique to test the purchasing power parity (PPP). Findings – The authors found that PPP held, but very weakly, in the long run between the Argentine, Brazil, Chile, Colombia, Indonesia, Korea, Mexico, Thailand and Venezuela and US exchange rate during our floating exchange rate period but that the deviations from it did not follow a stationary process. Nevertheless, it is also found that the deviations from PPP exists and can be characterized by a fractionally integrated process in nine out of 13 countries studied. Originality/value – The findings are consistent with the consensus of the empirical literature, reviewed earlier in this paper, on PPP between Argentine, Brazil, Chile, Colombia, Indonesia, Korea, Mexico, Thailand and Venezuela and the USA.

scholarly journals Market Efficiency and Long Run Purchasing Power Parity Disequilibria of the Mexican Peso Under Changing Exchange Rate Regimes

2004 ◽  
Author(s):  
Alejandra Cabello ◽  
Edgar Iván Ortiz ◽  
Robert I. Johnson
Keyword(s):  
Exchange Rate ◽  
Market Efficiency ◽  
Purchasing Power Parity ◽  
Inflation Targeting ◽  
Structural Changes ◽  
Exchange Rate Regimes ◽  
Purchasing Power ◽  
Power Parity ◽  
Macroeconomic Policies ◽  
Long Run

This paper tests if the efficient market version of Purchasing Power Parity (EMPPP) holds for the Mexican case for the 1970-2002 period in an environment of changing exchange rate regimes. Two regression analyses which extend PPP to a dynamic intertemporal model, based on market efficiency, are used, and in addition two unit root tests are applied. In general, the obtained empirical evidence does not support the EMPPP. Results suggest an inefficient market resulting from weak exchange rate policies and weak adoptions of several exchange rate regimes without proper inflation targeting and the application of strong and disciplined macroeconomic policies and structural changes.  

scholarly journals Nonlinear Cointegration and Asymmetric Adjustment in Purchasing Power Parity of the USA, Germany, and Pakistan

Complexity ◽  
2021 ◽  
Vol 2021 ◽  
pp. 1-7
Author(s):  
Kashif Ali ◽  
Hafsa Hina ◽  
Muhammad Ijaz ◽  
Mahmoud El-Morshedy
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Purchasing Power ◽  
Power Parity ◽  
Asymmetric Adjustment ◽  
Long Run ◽  
Nominal Exchange Rates ◽  
Trading Partners ◽  
The Usa ◽  
The Exchange Rate

The current study explores nonlinear cointegration as well as asymmetric adjustment to investigate the long-run purchasing power parity in three major trading partners of Pakistan. The ESTAR and LSTAR models were used to investigate the behavior of the nominal exchange rates. The findings declared that series follows the nonlinear exchange rate. The asymmetric behavior of the exchange rate allows the threshold cointegration model to be implemented. In the case of Pakistan-China, the result suggests that long-run PPP holds. As a result, trading will be more profitable if the exchange rate is varied in relation to major trading partners rather than just the US dollar.

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