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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. | Journal of Applied Finance Banking vol. 3 no. 6 2013 67-86 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2013 The Ratio Model and its Application A Revisit Zhibai Zhang1 and Xinyue Zou2 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. JEL classification numbers F31 F41 Keywords Equilibrium exchange rate Absolute purchasing power parity Penn effect Ratio model 1 Introduction Currency valuation or the calculation of the equilibrium exchange rate of a specific currency has been a popular topic in international finance since the 1910s because of the important role of exchange rate both in domestic economy and in global trade system. According to Isard 2007 p. 3 Assessing the equilibrium levels of exchange rates is an important responsibility of macroeconomic policymakers. Exchange rates have a major influence on the prices faced by consumers and producers throughout the world and the consequences of substantial misalignments can be extremely costly. The currency crises experienced by a number of emerging-market economies over the past decade testify to Corresponding Author Economics .
