A quantile panel approach to asymmetric and cross-correlated exchange rate shocks: reassessing Purchasing Power Parity in Asia

Abstract

This study investigates real exchange rate shocks in thirty Asian economies within the context ofthe Purchasing Power Parity (PPP) hypothesis using a recently developed quantile panel unit rootapproach that accounts for asymmetric persistence and cross-correlations. While conventionaltests support the PPP, our quantile analysis reveals that shocks are persistent at lower quantilesand transitory at higher quantiles, suggesting that PPP holds primarily at higher quantile condi-tions. This asymmetry suggests that the standard assumption of a constant unit root process maymask important nuances in how exchange rates adjust over time. Additionally, while the PPP holdsrobustly in some cases, it fails in others, implying that monetary policy exerts limited long-runinfluence on exchange rates and that short-run fluctuations are primarily driven by marketinterventions.