Panel unit root tests of purchasing power parity between Japanese cities, 1960–1998: disaggregated price data

This paper makes use of new panel unit root tests of Im et al. [Testing for unit roots in heterogeneous panels, Working paper, Department of Applied Economics, University of Cambridge, 1997], and Maddala and Wu [Oxford Bull. Econ. Stat. 61 (1999) 631] to examine whether long-run purchasing power parity (PPP) holds between major Japanese cities. By using a panel of 13 disaggregated consumer price indices from seven cities in Japan over the period 1960–1998, we are able to reject the null hypothesis that the relative price of goods between Japanese cities is non-stationary at the 5 percent level for all eight tradable goods and in two of the five non-tradable goods. Hence, we conclude that long-run PPP holds between major Japanese cities and PPP holds more for tradable goods than for non-tradable goods.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: EVIDENCE FROM PANEL SURADF TEST

This study reexamines the validity of long-run purchasing power parity (PPP) hypothesis using a battery of panel unit root tests for 11 developing countries in Africa over the period 1980-2007. Based on the conventional panel unit root tests, we found evidence that the monthly real exchange rates in these countries were mean reverting. By contrast, the series-specific unit root test proposed by Breuer et al. (SURADF) reveals that only six of the 11 RERs series were stationary using the US dollar as reference currency. Additionally, our results reveal that there is stronger evidence of the parity condition with the Rand-based rates than in the other currency-based rates like the US dollar or Euro. We conclude that PPP holds in some, but not all, of the African countries according to the SURADF tests.     

Does purchasing power parity survive political shocks in South Africa?

Does Purchasing Power Parity Survive Political Shocks in South Africa? — The objectives of the paper are to examine the Purchasing Power Parity (PPP) hypothesis for the South African economy during the period 1975–1994 using high-frequency data. The analysis is conducted both for the entire period and also for different subperiods in order to take into account possible structural changes. For the rand/ dollar exchange rate, the authors find on the basis of a unique long-run cointegrating relationship that there is significant evidence supporting the PPP hypothesis for the entire period. The use of nonlinear least squares and Johansen-Juselius procedures is made to reach the above conclusion.     

Food prices and long-run purchasing power parity in Africa

The purchasing power parity (PPP) theory is a cornerstone of exchange rate models in international economics. PPP is very important for two main reasons: first, it can serve as a prediction model for exchange rates, and second, it can serve as a benchmark in judging the level of exchange rate movements. This article utilised the Johansen cointegration technique in examining whether or not there is empirical support for long-run PPP in Africa. Annual data were used for exchange rates and food price indices in 25 countries covering the 1958-97 period. The empirical evidence showed strong support for long-run PPP in Africa, thereby providing wider acceptance for the applicability of PPP in exchange rate and other macroeconomic adjustment policies.     

Purchasing Power Parity in High-Inflation Countries: A Cointegration Analysis of Integrated Variables with Trend Breaks

This paper examines the long-run validity of purchasing power parity (PPP) for four high-inflation countries. The method of Zivot and Andrews (1992) is employed to detect the time-series behavior of the exchange rates and consumer price indices of these countries. We find that these variables are integrated with some trend breaks. We then utilize these data to test PPP using Johansen's (1988) multivariate cointegration technique. The cointegration tests are conducted with the correction of the finite sample bias and the adjustment for trend breaks. The results are consistent with the argument that, during the recent floating exchange-rate period, PPP holds well, at least in a weak form, in high-inflation countries where the general price level movement overshadows the factors causing deviations from PPP.     

Cointegration Tests of Purchasing Power Parity: the Case of the Thai Baht*

This paper will examine the validity of the purchasing power parity (PPP) hypothesis for the Thai baht vis-à-vis the currencies of Thailand's key trading partners under the new exchange rate regime using the cointegration technique. The major conclusions obtained from this empirical analysis may be broadly summarized as follows. First, the empirical evidence, based on the DF and ADF statistics, seems to suggest that the nominal exchange rates and relative prices are well characterized as non-stationary I(1) processes. Second, the cointegration analysis provides no evidence in support of a long-run equilibrium relationship between bilateral nominal exchange rates for the Thai baht vis-à-vis the currencies of Thailand's major trading partners and the corresponding relative price ratios. This implies rejection of PPP for these countries. If this is the case, considerable care should be taken in assessing the long-run implications for the real exchange rate, and thus competitiveness against Thailand's key trading partners, of shocks to the nominal exchange rate.     

Long-Run Purchasing Power Parity with Asymmetric Adjustment

Tests of purchasing power parity (PPP) that use panel data are more supportive of the theory than are bilateral tests. The article uses threshold cointegration to explore long-run PPP. Using data from the post-Bretton Woods period, we show that cointegration with threshold adjustment holds for a number of European countries on a bilateral basis. Focusing on France and Germany as base countries, we show that the error-correction model has important nonlinear characteristics in that prices and the exchange rate have markedly different adjustment patterns for positive gaps from PPP than negative gaps.     

Pitfalls in panel tests of purchasing power parity

Pitfalls in Panel Tests of Purchasing Power Parity. —The results of panel unit root tests applied to real exchange rates as a test of long-run purchasing power parity (PPP) diverge much. In particular, due to misspecifications there is little evidence of the convergence of real exchange rates for the German mark. This paper provides evidence of this issue by analyzing large panels of real exchange rates vis-à-vis the German mark and the dollar. In particular, the impact of the base country and various aspects of the dynamic specifications are analyzed. Overall, the results provide strong evidence in favour of PPP as a long-run relationship.     

Maximum likelihood cointegration tests of purchasing power parity: Evidence from seventeen OECD countries

Maximum Likelihood Cointegration Tests of Purchasing Power Parity: Evidence from Seventeen OECD Countries. — This paper examines the relevance of long-run purchasing power parity (PPP) during the recent floating exchange rate period, using Johansen’s maximum likelihood method for estimating and testing steady-state relations in multivariate vector autoregressive models. Thirty-two bilateral intercountry relations are considered and it is found that in many cases there exists a long-run relationship between exchange rates and international price differentials, which, however, significantly deviates from PPP in most instances.     

Evidence of long-run purchasing power parity: analysis of real asian exchange rates in terms of the Japanese yen

In this paper we find strong new evidence in favour of the long-run purchasing power parity (PPP) hypothesis in the bilateral real exchange rates between the Japanese yen and the currencies of the most important southeast Asian economies only when the presence of several possible structural breaks of the series is taken into account. Such evidence for PPP is weaker for these southeast Asian exchange rates with the US dollar, the German mark and the Australian dollar.     

Testing purchasing power parity for Japan and the US: A structural-break approach

In this work we empirically assess the weak and strong forms of purchasing power parity (PPP) hypothesis for the economies of Japan and US. Monthly data for the, traded-goods price indices and the JPY/USD exchange rate are employed for the, period from January 2000 to October 2012. This period includes large shocks, such as, the US subprime crisis and the 2011 Tsunami in Japan. We take into account possible, structural shifts and breaks by employing the class of Lee and Strazicich, 2003, Lee and Strazicich, 2004 unit, root tests. Empirical analysis suggests that a break corresponding to the start of the US subprime crisis is not rejected. Furthermore, utilizing the Gregory and Hansen (1996) and, Hatemi (2008) cointegration methodologies, the weak form of PPP is not rejected. We, also test the strong PPP hypothesis by using Dynamic Ordinary Least Squares, (DOLS). The empirical evidence rejects the strong form of PPP for the period, preceding the US subprime crisis in contrast to the period after.     

Real Exchange Rate Dynamics in the Asian Economies: Can Regime Shifts Explain Purchasing Power Parity Puzzles?

Abstract

We show that the strong version of the purchasing power parity (PPP) hypothesis holds in most of the US dollar real exchange rates using cointegration method that accounts for breaks in the models. The break dates in seven of the Asian currencies coincide with the two rounds of currency depreciation recorded during the 1997–1998 financial crises. We obtain a mean half-life estimate of about 10 months for PPP to converge to its long-run equilibrium level. Our confidence intervals based on persistence profile approach for the half-lives is much narrower than previous evidence might indicate. Taken together, these results show that mean reversion is stronger than commonly thought.     

A fractional cointegration approach to empirical tests of PPP: New evidence and methodological implications from an application to the Taiwan/US dollar relationship

A Fractional Cointegration Approach to Empirical Tests of PPP: New Evidence and Methodological Implications from an Application to the Taiwan/ US Dollar Relationship. —This paper applies a relatively new concept of fractional cointegration to shed some light on the validity of purchasing power parity as a long-run equilibrium condition, using the Taiwan/US dollar exchange rate. Findings suggest that, while standard tests of cointegration fail to support cointegration between nominal exchange rates, domestic and foreign prices, the fractional cointegration analysis permits deviations from equilibrium to follow a fractionally integrated process and hence captures a much wider class of parity or mean-reversion behaviour. The paper concludes by indicating areas in which fractional cointegration will be a particularly appropriate technique to unearth previously unfounded temporal characteristics.     

Assessing convergence to purchasing power parity: A panel study for ten OECD countries

Assessing Convergence to Purchasing Power Parity: A Panel Study for 10 OECD Countries. — The paper analyzes whether post-Bretton Woods real exchange rates of ten OECD countries are nonstationary so that long-run purchasing power parity (PPP) can be considered to hold. A test procedure is proposed which treats the various real exchange rates as a panel but still allows to assess the rate of convergence to PPP for each pair of currencies separately. It is shown that long-run (tradables-) PPP holds between all countries analyzed. Rates of convergence to PPP, however, are found to be quite different across countries. For most of the OECD countries convergence takes place faster than previously indicated.     

The European Periphery in the Era of the Gold Standard: The Case of the Spanish Peseta and the Pound Sterling from 1883 to 1931

This paper analyses the relationship between the Spanish peseta, the currency of a peripheral country, and the pound sterling, the central currency of the gold standard. From 1883, when Spain suspended metallic convertibility, until 1931, when Great Britain definitively abandoned gold, the peseta was a fiat currency with a flexible exchange rate regime. Our results confirm, first, long-run PPP hypothesis compliance for the peseta/pound sterling rate during the period. Secondly, we illustrate how the inclusion of peripheral variables (erratic trade and financial risk), significantly improves the short-run adjustment to the PPP hypothesis. It appears that the floating regime thus helped Spain to smooth out the required external adjustment process resulting from balance of payments shocks.     

Short-run and long-run effects of exchange rate change on trade balance: Evidence from China and its trading partners

As one of largest exporting countries in the world, China has experienced a large amount of trade surpluses for the past decade. However, a growing criticism has been focused on the manipulation of Chinese Yuan (RMB) exchange rate by the Chinese government. While China implemented the exchange rate reform policy in July 2005, the question, whether its currency is undervalued remains as a debatable issue. Different from previous studies by focusing on individual trading partners, this paper tests the short-run J-Curve hypothesis and long-run trade balance effect of real exchange rate between China and its eighteen major trading partners using a panel dataset over the 2005–2009 period. We adopt the methodologies of panel cointegration test, fully modified OLS for heterogeneous cointegrated panel (panel FMOLS) and panel error correction model (panel ECM) to investigate the above examination. Our empirical results lend support to the inverted J-curve hypothesis between China and its trading partners. However, we find that a real appreciation of RMB has a decreasing long-run effect on China's trade balance in only three of the eighteen trading partners, while it has an increasing long-run effect in five of the eighteen trading partners. These mixed findings, therefore, lead to the empirical evidence that the real appreciation of RMB has no overall long-run impact on China's trade balance.     

Export-output causality: The Irish case 1953–93

Despite proposed theoretical relationships, recent empirical research has found no conclusive support for a causal relationship between exports and output. Using the methodological approach based on the statistical theory of cointegration and Granger causality tests, the causal relationship between exports and output is examined here using Irish data. The Johansen technique is used and error-correction modeling is incorporated into the Granger causality tests. Results suggest that exports and GDP are cointegrated. Augmented Granger causality tests indicate support for the export-led growth hypothesis since there is evidence of short-run and long-run causality from exports to output.An earlier version of this paper was presented at the Forty-First International Atlantic Economic Conference in Paris, France, March 13–18, 1996. The author would like to thank Liam Gallagher and Van Newby for helpful comments.     

Real exchange rates and unit root tests

Real Exchange Rates and Unit Root Tests. — This paper examines monthly OECD exchange rate data (1979–1997) using univariate and panel data unit root tests. Some of these tests support the hypothesis of a unit root. But tests of cointegration reveal the existence of weak purchasing power parity relationships between bilateral nominal exchange rates and relative prices. We suggest that researchers need not conduct unit root tests on real exchange rate data when a modified version of PPP is used; or if there is a long enough time series. Given the definition of real exchange rates, the indicator should be stationary and should have intrinsic mean reverting behaviour.     

Deviation from Purchasing Power Parity: Evidence from Malaysia, 1973–1997

This paper presents an empirical test of Purchasing Power Parity (PPP) applied to the Malaysia ringgit for the period from 1973 (CPI) and 1984 (WPI) to 1997. Consistent with other research findings, it is detected that real exchange rate follows a random walk. Using multivariate cointegration methodology for the long-run relationship between real exchange rate and certain macro-economic variables, the study provides evidence supporting a long-run relationship between the real exchange rate and the current account balance and government spending, the last two variables have been not included in previous studies of this economy. The causality test between real exchange rate with the current account balance and government spending, however, does not receive support from the error-correction model. This suggests that both government spending and current account balance are not adequate to explain the changes in ringgit real exchange rate. The puzzle still remains unsolved.