Non-linear quantile unit root test and PPP: more evidence from Africa

It is now a common practice to establish stationarity of the real exchange rate as a sign of purchasing power parity (PPP) hypothesis. In this article, we consider the real effective exchange rates of 29 African countries. When we apply conventional linear unit root tests, we find support for the PPP in eight countries. However, when we shift to the newly introduced non-linear quantile unit root test, support for the PPP increases to 15 countries.     

A cointegration analysis of purchasing power parity: 1973–96

This paper tests the purchasing power parity (PPP) hypothesis for five industrial countries using cointegration and error-correction modeling. The cointegration test indicated that for all countries the PPP hypothesis holds in the long run but not in the short run. Further, the errorcorrection models suggested that deviations of the actual exchange rate from its long-run PPP value were corrected in subsequent periods. Finally, the high frequency monthly data models did a better job of tracking the turning points of the actual data than the low-frequency quarterly and yearly models.     

The real exchange rate and the black market exchange rate in developing countries

This article tests for the validity of the Purchasing power parity (PPP) theory using both the black market and the official exchange rates for panels with cross sectional dependency. The test is conducted using a newly developed, nonlinear IV panel unit root test that properly handles cross-sectional dependency for thirty-seven developing countries. We find that the null of joint unit root hypothesis is rejected for the whole panel, using the black market exchange rate, and for sub-panels of African and high inflation countries, using either exchange rate. The black market-based real exchange rates are, therefore, shown to provide stronger evidence for the purchasing power parity theory than do the official rates. This finding is consistent with the observation that black market exchange rates better represent market forces and thus are more relevant when testing for the validity of the PPP theory in developing countries.     

Further evidence on purchasing power parity and country characteristics

Using data from 76 countries, this paper investigates the relationship between country characteristics and the validity of purchasing power parity (PPP). Several interesting results are obtained based on dollar-based exchange rates. First, PPP holds for Africa and Latin America. Further, PPP tends to be supported for countries with high or moderate openness, low growth rates, high inflation rates and high nominal exchange rate volatility, respectively. Second, a single country characteristic seems inadequate to account for the validity of PPP. Third, PPP is supported if countries satisfy at least two characteristics of supporting PPP simultaneously. Finally, the main results of the paper are robust when the numeraire currency changes from the US dollar to Japanese yen.     

Purchasing power parity and country characteristics: Evidence from panel data tests

We examine long-run purchasing power parity (PPP) using panel data methods to test for unit roots in US dollar real exchange rates of 84 countries. We find stronger evidence of PPP in countries more open to trade, closer to the United States, with lower inflation and moderate nominal exchange rate volatility, and with similar economic growth rates as the United States. We also show that PPP holds for panels of European and Latin American countries, but not for African and Asian countries. Our findings demonstrate that country characteristics can help explain both adherence to and deviations from long-run PPP.     

Testing a theoretical model of mortgage demand on UK data

This study explores whether the long-run purchasing power parity (PPP) hypothesis holds for selected real exchange rates from Turkish economy during the period 1982M1–2003M12. In addition to conventional unit root tests, five different unit root test procedures have been applied including efficient point-optimal tests, extended M tests and GLS-detrended variants of DF tests, to four monthly real exchange rate series defined in terms of both producer and consumer price indices. The countries analysed are the USA, the UK, Germany and Italy which are major trade partners of Turkey. Mixed evidence is found for the long-run PPP hypothesis when real exchange rate is defined in terms of German DM and Italian Lira. However, the empirical analysis reveals that the PPP hypothesis holds strongly in the long-run for the UK£ and US$ based real exchange rates series using either PPI or CPI. In corroboration with other studies in the literature, the bias correlated half-life estimates suggest relatively faster speeds of adjustment supporting the view that the deviations from the PPP rate dissipate rather quickly for relatively high inflation countries.     

购买力平价偏离理论综述

购买力平价说是一种基本的汇率决定理论,但影响购买力平价关系成立的短期或长期经济因素众多,从而使得实际汇率经常偏离平价关系.本文对有关文献中各种购买力平价偏离模型进行了综合分析,阐明了生产率、政府支出、货币供给、偏好需求和定价策略等基本因素作用于实际汇率的经济机制.     

Purchasing power parity and dynamic error correction: Evidence from Asia Pacific economies

This study investigates the validity of purchasing power parity (PPP) hypothesis as a long run equilibrium condition for thirteen Asia Pacific economies using a generalized error correction model. The results of the generalized dynamic specification appear to support PPP for more countries than do standard tests for unit roots. Out of the thirteen bilateral exchange rates, evidence of PPP is found for only one (the Mexican peso/U.S. dollar rate) under traditional tests for unit roots, while seven of them support PPP under the generalized dynamic error correction model. It appears that one of the factors that lead standard tests for unit roots to fail to detect evidence of PPP may be the undue restrictions imposed on the model specification.     

Removal of farm subsidies in a regional economy: a computable general equilibrium analysis

There are a number of studies that examine the purchasing power parity (PPP) hypothesis. The empirical findings from the extant literature for the PPP hypothesis are mixed. This article applies univariate and panel Lagrange Multiplier (LM) unit root tests with one and two structural breaks to real exchange rates for 15 Asian countries. The univariate LM unit root tests find evidence of PPP for two-thirds of the sample. The results from the panel LM unit root test support long-run PPP for the Asian countries in the sample. The results from the LM panel unit root tests differ from those of existing panel unit root tests of PPP for Asian countries that have not allowed for the existence of structural breaks.     

PPP in the medium run: The case of Norway

Existing studies generally reject purchasing power parity (PPP) on data sets from countries that have been affected by large real shocks, including Norway. However, we offer strong evidence of PPP between Norway and its trading partners during the post-Bretton Woods period, in which the Norwegian economy has experienced numerous real shocks such as discoveries of large petroleum reserves and oil price shocks. In particular, the behavior of the Norwegian real and nominal exchange rates appears remarkably consistent with the PPP theory. Moreover, convergence towards PPP is relatively rapid; the half-life of a deviation from parity is just about 1.5 years. We show that such deviations are primarily eliminated by adjustments in the nominal exchange rate and we offer some explanations for the relatively rapid convergence towards PPP.     

Threshold cointegration and purchasing power parity in the pacific nations

The paper uses a threshold cointegration methodology to explore the properties of long-run purchasing power parity (PPP) in the Pacific nations. Using Japan and the USA as base countries, it is shown that long-run PPP holds for most Asian countries but that the adjustment mechanism is asymmetric. In contrast to symmetric error-correction models, it is found that asymmetric adjustments of nominal exchange rates play an important role in eliminating deviations from long-run PPP.     

Measuring international competitiveness: experience from East Asia

This paper uses a new measure of real exchange rates as an indicator of international competitiveness. This new measure involves defining all prices and exchange rates on an appropriately weighted basket of currencies rather than a single currency. The measure is applied to the data for Japan, Korea, Thailand, Malaysia and Singapore. For comparison purposes, we calculate real exchange rates based on purchasing power parity (PPP) for these countries. To check for the relative performance of the two measures, cointegration tests are employed. The results indicate that the new measure tends to be closely related with the export growth for the sample countries, while the PPP-based measure is not. Moreover, the PPP-based real exchange rates tend to understate the measures of competitiveness for these countries. This result has important implications in terms of the levels of these countries' exchange rates as well as the well-known Balassa hypothesis.     

Asymmetry dynamics in real exchange rates: New results on East Asian currencies

This paper provides new evidence on the purchasing power parity (PPP) hypothesis in six East Asian countries. Based on nonlinear unit root tests, we discovered that the results are broadly consistent with the fact that real exchange rates (RERs) follow a nonlinear mean reversion process. We presented new evidence that the adjustment towards the PPP parity is asymmetric (LSTAR process) above and below the equilibrium value in all but one case — the Malaysian ringgit (MYR). The empirical results suggest that it is important that the conventional tests of PPP be amended to take account of asymmetries in the adjustment process in RERs.     

Long-run purchasing power parity revisited: a Monte Carlo simulation

The existence of long-run purchasing power parity (PPP) implies that a cointegration vector of nominal exchange rate, domestic price, and foreign price is expected regardless of using the Engle-Granger two-step method or Johansen maximum likelihood approach. However, this paper has found conflicting results: the Engle-Granger technique tends to reject the long-run PPP hypothesis whereas the Johansen method is generally supportive of long-run PPP. Via Monte Carlo simulations, the present paper finds that the Johansen approach has a bias toward supporting long-run PPP especially under the circumstances in which the assumption of normally or/and independently and identically distributed disturbance terms is violated.     

PPP EXCHANGE RATE RULES,MACROECONOMIC (IN)STABILITY,AND LEARNING*

In order to maintain competitiveness, governments in developing economies seem to have pursued purchasing power parity (PPP) exchange rate rules, by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target. This article shows that these rules are likely to induce macroeconomic instability, as they generate sunspot‐driven fluctuations that are in fact learnable by agents in the Expectational‐Stability sense. It finds that the existence of these “learnable sunspots” depends, among others, on open economy features, including the degree of openness and the degree of exchange rate pass‐through to consumer's import prices.     

Purchasing power parity in the short and long run: a reappraisal of the post-1973 evidence

In this paper, an attempt is made to separate the short-run and long-run aspects of the purchasing power parity (PPP) relationship, using the techniques of band-spectral regression and cointegration for eight industrialized countries. The long-run PPP is first tested for all the eight countries, with reference to their nominal bilateral exchange rates vis-à-visthe US dollar. For five European currencies, the analysis is repeated with respect to the Deutschmark, with a separate consideration of the post-EMS period. In the concluding sections, possible reasons for PPP deviations are examined.     

Short-run exchange rate uncertainty in Latin America

This paper to obtain an ex ante measure of exchange rate uncertainty in 11 Latin American countries. As a preliminary issue, the purchasing power parity (PPP) condition is tested using Engle and Granger two-step procedure and Johansen method. The argument is that exchange rate uncertainty could be lower if PPP holds in the long run. The expected exchange rate uncertainty is estimated according to an extended version of the autoregressive, conditionally heteroscedastic (ARCH) model. The results show that the ARCH adjusment produces more efficient estimates in seven countries and that the acceptance of PPP has little effect on exchange rate uncertainty.     

Decomposing the persistence of real exchange rates

We propose a new methodology for decomposing the persistence of deviations from purchasing power parity (PPP). By directly comparing the impulse response function (IRF) of a vector autoregressive (VAR) model, where the real exchange rate is Granger caused by a set of candidate variables, with the IRF of the equivalent ARMA model for the real exchange rate, we capture the effects of the Granger-causing variables on the half-life of deviations from PPP. Our empirical results for a set of 20 industrial countries suggest that on average around 50% of the persistence of real exchange rates can be attributed to nominal interest rate differentials, inflation differentials and relative business cycle position with the numenaire country. Finally, we provide confidence intervals for the contributions of the aforementioned variables to the persistence of deviations from PPP by means of Monte Carlo simulations.     

Half-lives of Deviations from PPP: Contrasting Traded and Nontraded Components of Consumption Baskets

The paper examines the convergence question by contrasting the half‐lives of deviations from purchasing power parity (PPP) across traded and nontraded goods in an exchange rate model with sticky prices. In particular, empirical results show that in most cases the half‐lives of PPP deviations for traded goods are shorter than those for total consumption and for nontraded goods.     

Purchasing power parity and real factors

It is acknowledged that purchasing power parity (PPP) fails in empirical tests. The position adopted is that real factors are an omitted variable from the PPP relationship and are the cause of divergences from PPP. The real exchange rate as being determined by supply and demand shift factors (as in Stockman, 1987 and Neary, 1988) is modelled. We then empirically estimate a real exchange rate equation and use the fitted value as a generated regressor in tests of PPP. It is demonstrated that when changes in the real exchange rate are incorporated into the PPP relationship, PPP improves.