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.     

A managerial model of investment: overlooked alternatives

The long-run purchasing power parity (PPP) hypothesis is tested for nine bilateral sterling exchange rates, using recently developed techniques on cointegration and seasonal integration. The empirical findings show that none of the exchange rates and relative prices contain seasonal unit roots, but all have an autoregressive unit root. The cointegration tests overwhelmingly reject the PPP hypothesis as a long-run equilibrium condition for all countries concerned.     

Panel asymmetric nonlinear unit root test and PPP in Africa

This study revisits purchasing power parity (PPP) theory for 20 African countries using panel asymmetric nonlinear unit root test proposed by Emirmahmutoglu and Omay (2014), through the sequential panel selection method of Chortareas and Kapetanios (2009). While standard panel unit root tests fail to support the PPP, the empirical results from panel asymmetric nonlinear unit root test do support the PPP. However, additional tests reveal that support in all 20 African countries is mostly due to stationarity of the real effective exchange rates of Ghana and Rwanda where the adjustment process towards equilibrium is nonlinear and asymmetric.     

Internal Relative Price Stationarity in Long-Run Purchasing Power Parity

This study demonstrates that the joint relationship among domestic traded-goods prices, dometic nontraded-goods prices, foreign traded-goods prices, and foreign nontraded-goods prices is important to understanding rejections or confirmations of long-run PPP. This joint relationship is defined as the "cross-country internal relative price structure." For nine of the ten pairs of countries studied, the cross-country internal relative price structure is found to be stationary; thus, factors other than the influence of nontraded-goods prices must be responsible for the rejections of 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.     

Cointegration,dynamic structure,and the validity of purchasing power parity in African countries

The purpose of this paper is to test the validity of the purchasing power parity (PPP) in Africa in the context of a multivariate error-correction model. This approach allows for the consideration of long-run elasticities as well as the dynamics of the short-run adjustment of exchange rates to changes in domestic and foreign prices. Monthly data for fourteen African countries are used, and the period examined is 1973:4 through 2007:7 (i.e., 412 observations). Results from long-run cointegration analysis, short-run error correction models, persistence profile analysis and variance decomposition all confirm the validity of PPP in these moderate-to-high inflation countries, where estimates of half-life deviations from PPP are found to be outside the range suggested by Rogoff (1996).     

Instability in short-run adjustments to purchasing power parity: results for selected Latin American countries

According to the theory of purchasing power parity (PPP), there is a tendency toward equalization of different countries' price levels in common-currency terms. However, even assuming that a long-run PPP relationship exists, its relevance for policy makers in less developed countries (LDCs) will depend not only on the average speed of adjustment toward this relationship but also on the variability of such short-run adjustments. We present evidence of extreme volatility in adjustments toward PPP for four Latin American countries, based on time-varying-parameter estimates of error-correction models.     

Purchasing power parity in transition countries: Sequential panel selection method

This study applies the Sequential Panel Selection Method (SPSM), proposed by Chortareas and Kapetanios (2009) to test the validity of long-run purchasing power parity (PPP) for a sample of 14 transition countries, using real effective exchange rates, from 1994 to 2012 (for both monthly and quarterly data). SPSM classifies the whole panel into a group of stationary series and a group of non-stationary series. In doing so, we can clearly identify how many and which series in the panel are stationary processes. Empirical results from the SPSM using the Panel KSS unit root test (Ucar and Omay, 2009) with a Fourier function indicate that PPP holds true for most of these transition countries studied. Our results have important policy implications for these transition countries under study.     

Purchasing power parity for 15 Latin American countries: Panel SURKSS test with a Fourier function

This study applies Panel SURKSS test with a Fourier function to investigate the properties of long-run purchasing power parity (PPP) in fifteen Latin American countries over the period of December 1994 to February 2010. The empirical results from the univariate unit root and panel-based unit root tests indicate that PPP does not hold for these fifteen countries under study. However, results from the Panel SURKSS test with a Fourier function indicate that PPP is valid for these fifteen countries, with the exception of Honduras. Our results highlight the importance of incorporating both nonlinearities and structural breaks when testing the validity of long-run PPP. These results have important policy implications for these fifteen Latin American countries under study.     

More powerful threshold cointegration tests

Threshold cointegration tests have made a big splash in the literature by allowing for asymmetric adjustment in linear cointegration tests. This paper contributes to this literature by proposing new tests to improve the power of the conventional threshold cointegration tests. The new tests intuitively resolve one of the possible reasons that attribute to the low power of existing threshold cointegration tests and are easy to implement since they do not require any additional information outside of the system. Our simulation results show that the proposed tests improve the power of the existing threshold cointegration tests, especially as the signal-to-noise ratio increases, in contrast to other considered procedures. The efficiency gains are achieved regardless of sample size, the number of cointegrated variables, and the types of threshold specifications. The newly developed tests are applied to examine long-run purchasing power parity in the Pacific nations. In contrast to conventional cointegration tests, the proposed tests found long-run PPP holds in 5 out of 7 countries with appropriate asymmetric adjustments.     

Nonlinear adjustment in PPP—evidence from threshold cointegration

Nonlinearity in PPP has been carefully reported in number of studies. However, asymmetry with respect to the sign of the deviation and the dependency of the asymmetry on the exchange rate regime has largely remained outside the scope of those studies. The present paper partly fills this gap. It applies threshold cointegration techniques to real exchange rate dynamics between two Nordic countries, Finland and Sweden. First, it examines whether the sign of the deviation from equilibrium has any impact on adjustment. Second, it estimates an asymmetric band-type threshold cointegration in PPP. The results supported asymmetric adjustment in PPP. The single, asymmetric threshold indicated stronger adjustment during the flexible exchange rate regime. The band-type asymmetric threshold cointegration suggested that adjustment towards PPP would be fastest within the estimated band, which was interpreted as evidence for the target zone exchange rate regime. Accordingly, the inference on adjustment is sensitive to the type of nonlinearity used.I am grateful to the editor and two anonymous referees for many helpful comments and suggestions.     

Purchasing power parity: Evidence from developing Countries

This paper utilizes the dynamic error-correction model (DECM) to examine the issue of purchasing power parity (PPP) for 11 developing countries (Argentina, Bolivia, Colombia, Cote d'Ivoire, Ecuador, Guatemala, Kenya, Nigeria, Peru, South Africa, and Venezuela). For comparison purposes, evidence from the traditional unit root methods of the augmented Dickey-Fuller (ADF) and Phillips-Perron is presented. The results from the conventional unit root tests failed to find evidence of PPP in all of the cases. However, the results from the generalized error-correction model detected evidence of PPP for nine out of the 11 countries under consideration. Based on these results, it was concluded that PPP holds in the long-run for the sample countries and that the implicit restrictions associated with unit root tests prevented earlier studies from finding evidence in support of PPP theory.The views expressed in this paper are those of the authors only. They do not reflect the views of the World Bank.     

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.     

Revisiting purchasing power parity for African countries: with nonlinear panel unit-root tests

This study applies Panel Seemingly Unrelated Regressions (SUR) Kapetanios et al. (Kapetanios–Shin–Snell (KSS), SURKSS) tests, proposed by Wu and Lee (2009), to investigate the properties of long-run Purchasing Power Parity (PPP) in 15 African countries. The empirical results from the univariate unit root and panel based unit root tests indicate that PPP does not hold for these 15 countries under study. However, Panel SURKSS tests indicate that PPP is valid for four of these 15 countries. These results have important policy implications for these 15 African countries under study.     

Purchasing power parity for fifteen Latin American countries: Stationary test with a Fourier function

This study applies a stationary test with a Fourier function, proposed by Becker et al. (2006), to test the validity of long-run purchasing power parity (PPP) in fifteen Latin American countries over the period of December 1994 to February 2010. The empirical results from the univariate unit root tests indicate that PPP does not hold for these fifteen countries under study. However, a stationary test with a Fourier function indicates that PPP is valid for four of these 15 Latin American countries and they are Brazil, Chile, Ecuador and Uruguay. These results have important policy implications for these fifteen Latin American countries under study.     

Purchasing Power Parity By sectors From Selected European Countries: Cointegration and Structural Breaks

In this paper we study the long-run Purchasing Power Parity (PPP) hypothesis by traded and non-traded sectors using cointegration techniques in the presence of structural breaks, for a set of European countries during the period 1975:1-1995:12. This approach is complementary to many existing approaches to investigate the PPP Hypothesis. We find evidence in favor of long-run PPP hypothesis when commodity prices and used in the presence of structural breaks. This result lends support to the integration process in the European Union. [C22, F30]     

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.     

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.     

Revisiting purchasing power parity for East Asian countries using the rank test for nonlinear cointegration

This study applies a simple and powerful nonlinear rank test, proposed by Breitung (2001) to test the validity of long-run Purchasing Power Parity (PPP) in a sample of East Asian countries over the period March 1985–September 2008. The empirical results indicate that PPP holds for all of East Asian countries studied and the nominal exchange rate, domestic Consumer Price Index (CPI) and the US CPI are all linearly interrelated with the exception of China. Our results have important policy implications for these East Asian countries under study.     

The long-run convergence of exchange rates and prices in the European Union

This paper provides tests of Purchasing Power Parity (PPP) for members of the EU-27 not in the euro area, using multivariate and panel cointegration techniques, for the period since the introduction of the euro currency in 1999 until the end of 2009. The results indicate that long-run PPP holds in ten cases and that domestic prices or the nominal exchange rate is the main driver of the short-run adjustment to stationarity. These results are discussed in terms of monetary convergence in the long-run.