Journal of Applied Finance & Banking

The Ratio Model and its Application: A Revisit

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• Abstract

  In this paper, the ratio model, a simple currency valuation model proposed by Zhang (2012, International Research Journal of Finance and Economics, issue 97, pp. 55–59), is revisited. We use both the ratio and purchasing power parity (PPP) models to value the bilateral real exchange rates (RERs) of five Asian industrial countries and areas, namely, Japan, Korea, Taiwan, Hong Kong, and Singapore, against the United States. In the early 1950s to 2009, the RER misalignments of four new industrial countries and areas from the ratio model converged, but those from the PPP model did not, implying the competitiveness of the ratio model against the PPP model both in currency valuation and as an RER anchor. Based on the two models, from 2010 to 2011, the yen was shown to be overvalued by approximately 30%, whereas the Singapore dollar was undervalued by approximately 20%. However, the conclusions on the other three RERs were not consistent.