For the last two meetings, I decided to find a paper that is related to purchasing power parity and exchange rate in order for us to know what are some evidences that we can find and what lessons can we learn from empirical researches.

October 4, 2010
Paper: Wu, J.L., Cheng, S.Y., and Hou, H. (2010) Further evidence on purchasing power parity and country characteristics, International Review of Economics and Finance, doi:10.1016/j.iref.2010.06.004

The paper investigated the relationship between country characteristics and the validity of purchasing power parity (PPP) by using 76 countries from Africa, Asia, Europe and Latin America. The authors identified five country characteristics (openness, distance to USA, growth, inflation and volatility) to support the validity of PPP. The study has the following, according to the authors, “intriguing” results:

1. PPP is valid for Africa and Latin America and not for Asia and Europe.

2. Validity of PPP is subject to high openness, high inflation rates, low growth rates, and high nominal exchange rate volatility.

3. PPP holds if countries in the region satisfy at least two characteristics of supporting it.

4. Premature to conclude for PPP validity based on an individual country characteristic.

5. Above results are not affected significantly if yen-based exchange rates are applied.

September 27, 2010
Paper: Xu, Yingfeng (2008) Lessons from Taiwan’s experience of currency appreciation, China Economic Review, 19, 53-65.

The paper discussed short- and long-run consequences and lessons that China can learn from Taiwan’s currency appreciation. From 1986-1992, the new Taiwan dollar appreciated 58% against the US dollar after the authorities gave up foreign exchange market interventions to improve monetary control. The paper found that export production and employment declined in the short-term, but it boosted the development of the country’s manufacturing to more skill-oriented and capital-intensive activities and also accelerated the growth of the service sector.

Two lessons that the paper presented for the current expansion in China:

1. Need to consider seriously the trend of Renminbi appreciation against the US dollar, because there’s a good chance of having a long-term trend in the future.

2. Gradual movement from a heavily managed float to a pure floating rate to avoid turbulent short-run consequences.

September 20, 2010
Syllabus explanation: course summary, important deadlines, requirements for grading, and introduction to GRETL software

狄 強

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