Asian Pacific Real Exchange Rates and Relative Prices

In this paper, the evidence for a relative tradables-nontradables price based explanation for long run movements in East Asian real exchange rates is examined. Using both time series cointegration techniques and panel regression procedures, I find that the real exchange rates are cointegrated with relative prices. Hence, I conclude that there is substantial evidence in favor of such a relativeprice explanation. However, the evidence is by no means conclusive, especially as it relates to some of the countries now growing the most rapidly--China, Indonesia, and Thailand. The fact that the relative price of tradables can exhibit such pronounced nonstationarity (of either a deterministic or stochastic nature) is troubling.