Explosive bubbles in the US-China exchange rate? Evidence from right-tailed unit root tests

El Montasser, Ghassen; Fry, John; Apergis, Nick

Abstract

In this article we apply novel right-tailed unit root (sup Augmented Dickey-Fuller (SADF) and generalized sup ADF) tests to the China–US exchange rate. The empirical results document that the recent financial crisis in 2008 may be preceded by early warning signs of exuberance. Using the SADF test, evidence of an explosive behavior in the nominal exchange is found from 2005 onwards. This period coincides with both financial reforms in China and early indications of an impending US crisis that both have been reported in the literature. Our findings suggest that such an explosive behavior may be attributable to differences in the relative prices of traded goods. Policy implications are also derived.

Citation

El Montasser, G., Fry, J., & Apergis, N. (2016). Explosive bubbles in the US-China exchange rate? Evidence from right-tailed unit root tests. China Economic Journal, 9(1), 34-46. https://doi.org/10.1080/17538963.2015.1125591

• Journal Article Type: Article
• Acceptance Date: Nov 24, 2015
• Online Publication Date: Jan 13, 2016
• Publication Date: 2016-01
• Deposit Date: Feb 4, 2022
• Journal: China Economic Journal
• Print ISSN: 1753-8963
• Publisher: Taylor & Francis
• Peer Reviewed: Peer Reviewed
• Volume: 9
• Issue: 1
• Pages: 34-46
• DOI: https://doi.org/10.1080/17538963.2015.1125591
• Keywords: Rational bubbles; Explosive bubbles; Exchange rates; US dollar–Chinese yuan exchange rate
• Public URL: https://hull-repository.worktribe.com/output/3921018