Measuring Misalignment: Purchasing Power Parity and East Asian Currencies in the 1990s

Author/Editor:

Menzie David Chinn

Publication Date:

September 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The concept of purchasing power parity (PPP) is used to evaluate whether eight East Asian currencies were overvalued on the eve of the 1997 crises. The Johansen and Horvath-Watson cointegration test procedures are applied to bilateral and multilateral exchange rates, deflated using CPIs, producer price indices (PPIs), and price indices of export goods. The second deflator yields the greatest evidence of “stationarity.” The study find’s that the Malaysian, Philippines, and Thai currencies were overvalued, while the Korean and Indonesian were substantially undervalued. Mixed results were obtained for the others. Measures of the equilibrium rate based on time trends in CPI-deflated rates typically suggest larger overvaluations.

Series:

Working Paper No. 1999/120

Subject:

Consumer price indexes Exchange rates Foreign exchange Prices Producer price indexes Purchasing power parity Real exchange rates

English

Publication Date:

September 1, 1999

ISBN/ISSN:

9781451854251/1018-5941

Stock No:

WPIEA1201999

Pages:

29

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