Purchasing Power Parity

The paper provides a selective and critical review of the literature on purchasing power parity and real exchange rates, with special reference to the literature of the last two decades.     

Purchasing Power Parity and Interest Parity in the Laboratory

This paper analyses purchasing power parity and uncovered interest parity in the laboratory. It finds strong evidence that purchasing power parity, covered interest parity, and uncovered interest parity hold. Subjects are endowed with an intrinsically useless (green) currency that can be used to purchase another useless (red) currency. Green goods can be bought only with green currency, and red goods can be bought only with red currency. The foreign exchange markets are organised as call markets. In the treatment analysing purchasing power parity, the price of the red good varies. In a second treatment, the interest rate on red currency varies. In a third treatment, the interest rate on red currency varies, and the price of the red good is random.     

Revisiting Purchasing Power Parity in OECD

This study revisits Purchasing Power Parity theory (PPP) in the 34 OECD countries during January 1994–August 2013. We use a new panel stationary test with both sharp breaks and smooth shifts, a novel approach to panel unit-root testing, proposed by Bahmani–Oskooee et al. (2014). The results indicate that the PPP holds in half of the 34 OECD countries. These results indicate the importance of proper modelling of both sharp breaks and smooth shifts in real effective exchange rate series of OECD countries.     

人民币汇率与购买力平价

本文基于购买力平价理论,通过实证分析的方法,对1980-2008年的人民币兑美元汇率与中美消费物价指数的数据进行研究分析,以探究购买力平价理论与人民币汇率之间存在的关系.     

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.     

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.     

A Comparison of Purchasing Power Parity between China and Japan

In this paper, the difference of income and consumption levels between Chinese and Japanese town dwellers＇ is compared, based on the purchasing power parity of each currency. The results using a historical series of the data and cross section data of the two countries are shown. And whenever the classification of Chinese and Japanese data is inconsistent, we reclassify Chinese material according to the Japanese classification.     

Purchasing Power Parity and Price Fluctuations in China before July 1937

In this paper, we provide an empirical investigation of the purchasing power parity (PPP) hypothesis for China before July 1937. Using the monthly data from 1922 to 1937, we find clear and consistent evidence in favor of the purchasing power parity relationship. This naturally leads to the conclusion that the degree of Chinese market integration with the West was substantial before July 1937. These findings offer an empirical interpretation of the rise and fall of the Chinese price level during the Great Depression. It also has further implications of the impact of the American Silver Purchase Act of 1934 and the assessment of the 1935 currency reform on the Chinese economy.     

The Canadian Dollar and Purchasing Power Parity during the Recent Float

This paper re-examines the purchasing power parity (PPP) concept for five bilateral Canadian dollar exchange rates. The Johansen cointegration technique is employed. Evidence is found in favor of PPP when wholesale prices are used but not when consumer prices are utilized; whereas, in all but one case, it is not possible to reject the symmetry and proportionality hypotheses. Furthermore, it is shown that the dimension of the cointegration space may exhibit sample dependency, but the estimated coefficients are stable in recursive estimations. Finally, by implementing the multivariate KPSS test for the null hypothesis of cointegration, Johansen's results are overturned.     

Money Demand and Purchasing Power Parity (PPP), in the Republic of South Africa

We have examined empirically two important economic relationships, the Purchasing Power Parity (PPP) and the money demand relationship, among the consumer prices, money, output, interest rates, and the nominal rand/dollar exchange rate of the Republic of South Africa (RSA) for the sample period from 1993 second quarter to 2003 second quarter within the frameworks of co-integration and Error Correction Model (ECM). It is established that the strong version of the PPP including the proportionality and the symmetry hypothesis, is supported. The changes in the rand/dollar exchange rates are influenced by the long term trends in the consumer prices of the RSA and the USA. There also exists a well defined money demand function for this period. The broad money demand is influenced by the consumer prices, the GDP and the interest rates. The short-term interest rates are found to be the own rate of return for broad money and the long-term bond yield is the opportunity cost of holding money. The monetary policy works through the short term interest rates.

     

Purchasing Power Parity and the European single currency: Some new evidence

The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency.     

人民币升值背景下再谈购买力平价

中国人民银行于近日宣布人民币对美元汇率升值2%.在这一背景下,本文简要回顾了购买力平价理论（PPP）,并总结了国际上对中国购买力的测算方法,同时针对人民币汇率与我国PPP之间的较大差异,提出产生偏差的具体原因.最后得出结论：必须结合我国自身的改革进程和现实经济的运行特点来分析购买力平价,才能确定人民币汇率的合理水平.     

Convergence to Purchasing Power Parity at the Commencement of the Euro*

We investigate convergence towards purchasing power parity (PPP) within the eurozone and between the eurozone and its main partners using panel data methods. We find strong rejections of the unit‐root hypothesis, and therefore evidence of PPP, in the eurozone for different numéraire currencies, as well as in the eurozone plus the United States with the dollar as the numéraire currency, starting between 1996 and 1999. The process of convergence towards PPP, however, begins earlier, following the currency crises of 1992 and 1993, adoption of the Maastricht Treaty, and official completion of the Single Market.     

基于购买力平价的江苏省区域经济分异

利用购买力平价理论进行江苏省地区间购买力平价,采用基尼系数、Mann-Kendall法和聚类分析的方法对1985—2012年江苏"名义"和"实际"区域经济差异变化和格局进行分析,研究结果表明:1通过地区间购买力平价,江苏省"实际"区域经济差异呈现缓慢上升状况;2通过地区间购买力平价,江苏省地区经济差异的变化可分为四个阶段:1985—1992年、1993—2000年、2001—2008年、2009—2012年;3地区间购买力平价不会改变经济差异变化的表现形式,江苏地级市间的经济差异主要表现为三大地带的差异;4地区间购买力平价表现为对于较为发达地区的经济发展水平测度影响较大。     

A Test of Long-run Purchasing Power Parity Allowing for Structural Breaks*

If exchange rates and prices are integrated processes, standard econometric tests of the purchasing power parity (PPP) hypothesis may be biased towards rejection. This paper avoids this problem by using the Engle and Granger (1987) theory of cointegrated processes. If the absolute version of purchasing power parity is true, and nominal exchange rates and prices are integrated processes, inter-commodity arbitrage should ensure that the real exchange rate is stationary. The stationarity hypothesis is tested using Australian real exchange rate data for the 1890–1984 period We find that the effective real exchange rate cannot be modelled as a stationary process and therefore reject the absolute version of PPP. We also employ a test for structural breaks due to, for instance, the oil price shock and find mixed results. Another interpretation of our results is that the real exchange rate was affected by a series of permanent, real shocks during the sample period     

On the Joint Test of the Uncovered Interest Parity and the Ex‐ante Purchasing Power Parity

This study revisits the relation between the uncovered interest parity (UIP), the ex‐ante purchasing power parity (EXPPP) and the real interest parity (RIP) for the UK and Japanese vs US data. The original contribution is on developing some joint coefficient‐based tests, obtained by rewriting the UIP, the EXPPP and the RIP as a set of cross‐equation restrictions in a vector autoregression (VAR) framework. Test results point to a “forward premium” bias in both the UIP and the EXPPP. The latter result is novel in the literature and stems from testing the PPP in expectational terms. Moreover, the results suggest a currency‐dependent pattern for the UIP, contrarily to the EXPPP equation. Finally, it is shown that conditioning the VAR on M3 growth differential has important explanatory power in resolving the aforementioned biases in both the UIP and EXPPP equations for the UK vs US data. At the same time, variables having a strong forward‐looking component (i.e. share prices) help recover a unitary coefficient in the UIP equation.     

Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity

Simulations demonstrate that when unit-root behavior is rejected in a Levin and Lin panel test, it is incorrect to infer that all series are stationary. Recent tests proposed by Im, Pesaran and Shin, and by Sarno and Taylor, are also incapable of determining the mix of I (0) and I (1) series in a panel setting. This paper introduces a new unit-root test that allows the researcher to discern which series are I (0) and which ones are I (1). The test has double to triple the power of single-equation augmented Dickey–Fuller tests.     

Testing for Long Run Purchasing Power Parity: An Examination of Korean Won

My small-scale macroeconomic model of the Taiwanese economy contains behavioral equations to explain saving, investment, the rate of economic growth, export demand, export supply, and import demand. Exploiting the two definitions of the current account (national saving ? omestic investment and export + net factor income from abroad ? imports), the in-sample dynamic simulation tracks the current account remarkably well. If the Taiwanese government pursued deliberate policies to reduce the current account surplus, this model indicates that the effects on the economy would depend critically on whether the current account surplus was eliminated by reducing national saving or by raising domestic investment. [430]