ARDL Approach to the Exchange Rate Overshooting in Taiwan

ARDL Approach to the Exchange Rate Overshooting in Taiwan This paper re-examines Dornbusch’s (1976) sticky-price monetary model to exchange rate determination by employing both conventional Johansen’s (1988, 1990, 1994) maximum likelihood cointegration test and the ARDL Bound test by Pesaran, Shin, and Smith (2001) for the monthly data of Taiwan over the period 1986:01 ∼ 2003:04. Ambiguous results are found for the long-run equilibrium relationship between the NTD/USD exchange rate and macro fundamentals. With the advantage that ARDL Bound test incorporates both I(1) and I(0) series, we conclude our empirical evidence that there is no long-run equilibrium relationship between exchange rates and macro fundamentals. Moreover, for the short-run dynamic response, the result from the ARDL-UECM-MAIC (1, 10, 10, 8, 10) setting supports the overshooting of currency depreciation as pre-described by Dornbusch (1976). However, this overshooting phenomenon does not exist the current month, but one month after. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

ARDL Approach to the Exchange Rate Overshooting in Taiwan

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2005 by Springer Science+Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-005-3179-6
Publisher site
See Article on Publisher Site

Abstract

This paper re-examines Dornbusch’s (1976) sticky-price monetary model to exchange rate determination by employing both conventional Johansen’s (1988, 1990, 1994) maximum likelihood cointegration test and the ARDL Bound test by Pesaran, Shin, and Smith (2001) for the monthly data of Taiwan over the period 1986:01 ∼ 2003:04. Ambiguous results are found for the long-run equilibrium relationship between the NTD/USD exchange rate and macro fundamentals. With the advantage that ARDL Bound test incorporates both I(1) and I(0) series, we conclude our empirical evidence that there is no long-run equilibrium relationship between exchange rates and macro fundamentals. Moreover, for the short-run dynamic response, the result from the ARDL-UECM-MAIC (1, 10, 10, 8, 10) setting supports the overshooting of currency depreciation as pre-described by Dornbusch (1976). However, this overshooting phenomenon does not exist the current month, but one month after.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 1, 2005

References

  • Cointegration and Unit Roots
    Dolado, J. J.; Jenkinson, T.; Sosvilla-Rivero, S.
  • Maximum Likelihood Estimation and Inference on Cointegration with Applications to the Demand for Money
    Johansen, S.; Juselius, K.
  • Exchange Rate Undershooting
    Levin, J. H.
  • The Balassa-Samuelson Hypothesis and Oil Price Shocks in a Small Open Economy: Evidence from Cyprus
    Pattichis; Charalambos; Kanaan, Mona

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