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Three essays on long run movements of real exchange rates

by 1969- Park, Sungwook

Abstract (Summary)
My dissertation studies statistical properties of the measure that Engel uses in his 1999 paper and presents new evidence in favor of the Balassa-Samuelson theory. The Balassa-Samuelson theory implies that the importance of the traded goods component in the real exchange rate movement decreases over time. Engel’s empirical results, however, indicate that the importance is very high and even increasing for the long run for some countries. The tests based on Engel’s measure show no statistical evidence for the decrease in the importance of the traded goods. My dissertation consists of three essays. The essay titled “Long-run Real Exchange Rate Changes and the Properties of the Variance of k-di¤erences,” examines the statistical properties of the measure Engel uses, the variance of k-di¤erences. I show that the variance of k-di¤erences tends to return to the initial value as k approaches the sample size whether the variable is stationary or unit root nonstationary. My results imply that the increasing variances for k-values close to the sample size cannot be interpreted as evidence of an increase in the importance. In my second essay, “A Monte Carlo Investigation on the Estimator of Ratio of Long Run Variances,”I investigate whether the high level of importance Engel …nds should be attributed to the high persistence of the traded goods component by means of a Monte Carlo simulation. My simulation results imply that the high ratio is more likely to be attributable to the volatility of errors of the traded goods component, not ii to its persistence. I also …nd that the power of the test based on Engel’s measure is very low for given parameter values. In my third essay, " Higher Power Tests for the Failure of Long Run Purchasing Power Parity, " I apply a covariate augmented point optimal test to three di¤erent real exchange rates, each of which is constructed with CPI, PPI, and Export/Import price index, respectively. The covariate test for the real exchange rates based on PPI and Export/Import price index gives approximately 50% rejection rate, which is comparably high and higher than that for CPI, consistent with the Balassa-Samuelson theory. iii To my parents and my family iv
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Advisor:

School:The Ohio State University

School Location:USA - Ohio

Source Type:Master's Thesis

Keywords:exchange prices

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