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Time-varying cointegration models and exchange rate predictability in Korea

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Title Time-varying cointegration models and exchange rate predictability in Korea
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Material Type Articles
Author(English)

Park, Sookyung; Park, Cheolbeom

Publisher

[Sejong]:Korea Development Institution

Date 2015-11
Journal Title; Vol./Issue KDI Journal of Economic Policy:vol. 37(no. 4)
Pages 20
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Economic System
Holding Korea Development Institution; KDI School

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 timevarying 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.