KDI Journal of Economic Policy
- Volume 37 Issue 4
- /
- Pages.1-20
- /
- 2015
- /
- 2586-2995(pISSN)
- /
- 2586-4130(eISSN)
Time-varying Cointegration Models and Exchange Rate Predictability in Korea
- PARK, SOOKYUNG (Department of Economics, Korea University) ;
- PARK, CHEOLBEOM (Department of Economics, Korea University)
- Received : 2015.10.14
- Published : 2015.11.30
Abstract
We examine the validity of popular exchange rate models such as the purchasing power parity (PPP) hypothesis and the monetary model for Korean won/US dollar exchange rate. Various specification tests demonstrate that Korean data are more favorable for both models based on time-varying cointegration coefficients as compared to those based on constant cointegration coefficients. When the abilities to predict future exchange rates between those models based on time-varying cointegration coefficients are compared, an in-sample analysis shows that the time-varying PPP (monetary model) has better predictive power over horizons shorter (longer) than one year. Results from an out-of-sample analysis indicate that the time-varying PPP outperforms models based on constant cointegration coefficients when predicting future exchange rate changes in the long run.
Keywords