Central Bank Intervention, Exchange Rate Regime and the Purchasing Power Parity

19 Pages Posted: 8 Aug 2016

See all articles by Luke Lin

Luke Lin

National Kaohsiung University of Science and Technology - Department of Finance and Banking

Chun I. Lee

Loyola Marymount University - Department of Finance and Computer Information Systems

Date Written: August 2016

Abstract

Motivated by the argument that central bank intervention leads to non‐linear exchange rate adjustment processes, we examine purchase power parity (PPP) by applying quantile unit root tests to the exchange rates of the New Taiwan Dollar (NTD) vis‐à‐vis seven Asian currencies. We show that exchange rate regime matters in determining whether PPP holds. While PPP holds overwhelmingly during the period when the NTD is under the fixed exchange rate regime, it is present only for some exchange rates during the managed floating rate regime. For exchange rates exhibiting mean reversion, the reversion occurs mainly when the shocks are large. In contrast to conclusion in the literature, our test results show little evidence of asymmetric mean reversion between positive and negative shocks.

Suggested Citation

Lin, Luke and Lee, Chun I., Central Bank Intervention, Exchange Rate Regime and the Purchasing Power Parity (August 2016). The World Economy, Vol. 39, Issue 8, pp. 1256-1274, 2016. Available at SSRN: https://ssrn.com/abstract=2819241 or http://dx.doi.org/10.1111/twec.12372

Luke Lin (Contact Author)

National Kaohsiung University of Science and Technology - Department of Finance and Banking ( email )

2, Juoyue Road
Nantsu, Kaohsiung, 811
Taiwan

Chun I. Lee

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

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