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.     

Revisiting long-run purchasing power parity with asymmetric adjustment for G-7 countries

In this study, we applied a threshold cointegration test advanced by Enders and Siklos (2001) to investigate the properties of asymmetric adjustment on long-run purchasing power parity (PPP) in G-7 countries between January 1994 and April 2010. Although there was strong evidence of long-run PPP for these G-7 countries, with the exception of Canada, the adjustment mechanism was asymmetric. These results have important policy implications for G-7 countries.     

Nonlinear adjustment to purchasing power parity for ASEAN countries

This study applies a simple and powerful nonlinear unit root test, proposed by Sollis (2009), to test the validity of long-run purchasing power parity (PPP) in a sample of ASEAN countries. The empirical results indicate that PPP only holds for three of these ASEAN countries studied, and the adjustment toward PPP is found to be nonlinear and asymmetric.     

The trend behavior of real exchange rates: Evidence from OECD countries

The Trend Behavior of Real Exchange Rates: Evidence from OECD Countries. — This paper examines the validity of purchasing power parity (PPP) under the current float using real effective exchange rates of eleven OECD countries. The author employs a test which allows for a one-time change in the intercept and/or in the slope of the trend function. The timing of the structural break is treated as unknown and is endogenously searched from the data. It is found that for a vast majority of countries, the real exchange rate can be characterized as a stationary process with a broken trend. The paper provides support for PPP in the long run.     

Real interest parity: A note on Asian countries using panel stationarity tests

Existing panel data studies of real interest parity are either unable to identify which panel members are characterised by stationary real interest differentials, or are subject to size distortion resulting from the presence of structural breaks and cross-sectional dependencies. Using a panel stationarity testing procedure recently advocated by Hadri and Rao (2008) that allows for structural breaks and cross-sectional dependency, we are unable to reject the stationarity of Asian real interest rate differentials.     

Market efficiency,purchasing power parity,and black markets: Evidence from latin american countries

Zusammenfassung Markteffizienz, Kaufkraftparit?t und Schwarzm?rkte: Evidenz aus lateinamerikanischen L?ndern. - Die Arbeit verwendet den von Rogalski/Vinso und Roll entwickelten theoretischen Rahmen, um das Verhalten der W?hrungen von Kanada und den USA sowie von ausgew?hlten lateinamerikanischen L?ndern auf dem dortigen Schwarzmarkt zu untersuchen. Abweichungen von der Kaufkraftparit?t werden analysiert, ebenso die Beziehungen zwischen diesen Abweichungen, den Wechselkursen und Inflationsdifferentialen, um die Vereinbarkeit der Kaufkraftparit?t mit der Konzeption der effizienten M?rkte und mit dem monet?ren Ansatz zu prüfen. Die Ergebnisse stützen im allgemeinen die Hypothese der effizienten M?rkte und liefern interessante Informationen über eine normalerweise vernachl?ssigte Gruppe von Wechselkursen.

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Résumé Efficacité de marché, parité de pouvoir d’achat et marchés noirs: Evidence des pays latino-américains. - Les auteurs utilisent le cadre théorique développé par Rogalski/ Vinso et Roll pour analyser la performance des monnaies de marché noir des pays latinoaméricains sélectionnés ainsi que des monnaies des E. U. et de Canada. Le comportement des déviations de la parité du pouvoir d’achat (PPA) est examiné aussi bien que les relations entre ces déviations, les taux de change et les différences d’inflation pour analyser la compatibilité de la PPA avec la conception des marchés efficients et l’approche monétaire. Les résultats supportent généralement l’hypothèse de marché efficient et offrent des informations intéressantes sur un groupe des taux de change généralement négligé.

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Resumen Mercados eficientes, paridad del poder adquisitivo y mercados negros: Evidencia de países latinoamericanos. - En este trabajo se utiliza el marco teórico desarrollado por Rogalski/Vinso y por Roll para analizar el funcionamiento de mercados negros seleccionados en Latinoamérica, los EEUU y Canadá. Se examina el comportamiento de las desviaciones de la paridad del poder adquisitivo (PPA) como también las relaciones entre las desviaciones, los tipos de cambio y las diferencias entre las tasas de inflatión con el fin de investigar la compatibilidad del PPA con los enfoques de mercados eficientes y monetario. Los resultados obtenidos apoyan en general la hipótesis de mercodos eficientes e iluminan aspectos interesantes de tipos de cambio habitualmente obviados.

     

Ex ante purchasing power parity: An empirical note

Conclusions In the paper, the EAPPP theory was discussed and three different tests with increasingly statistic power were proposed and implemented. The results are mixed, since the theory passed the randomness and orthogonality tests, but not the direct regression test. The impression is that EAPPP seems to hold in a weak sense, since the evidence confirms random movements of real exchange rates and an efficient use of information by agents but not the constraints on (14) postulated by EAPPP. In general, the results of the present study are in accordance with those of Cumby and Obstfeld [1984], Mishkin [1984], MacDonald [1985] and Gaab et al. [1986] who found only weak support to the EAPPP theory. Furthermore, in the case of the dollar-lira exchange rate, our findings are different from those of Tronzano [1987] according to which “although PPP holds very badly in its traditional (absolute or relative formulation), ex ante PPP (both in “weak” and in “strong” version) [is] highly supported by data”. In fact, in our case both the second orthogonality test and the regression test are unfavourable to the EAPPP.     

Export variety and export performance: Empirical evidence for the OECD countries

Export Variety and Export Performance: Empirical Evidence for the OECD Countries. — Does product variety matter for export performance? This has been suggested by the new trade theory. In the present paper, we investigate empirically whether increasing export variety has contributed to the export growth of the OECD countries. We calculate direct measures of export variety and estimate pooled export demand equations for 15 OECD countries. The econometric results suggest that producing highly differentiated export goods gives a competitive advantage which allows to sell more products.     

The effects of input tariffs on productivity: panel data evidence for OECD countries

Based on a panel of 16 OECD countries and 10 manufacturing industries over 1996–2007, this paper investigates the impact of tariffs on foreign intermediate goods on productivity growth in downstream manufacturing industries. The results show that imposing tariffs on imported intermediate goods is particularly harmful for industries that operate close to the global technological frontier. We also consider the possibility that input-tariff liberalisation may have different effects depending on the technological content of imported intermediate goods. Our findings suggest that protecting imports of high-technological goods is more harmful for productivity improvements in industries that operate close to global best practice.     

Trade with Asia and skill upgrading: Effects on labor markets in the older industrial countries

Trade with Asia and Skill Upgrading: Effects on Factor Markets in the Older Industrial Countries. — The trade and labor nexus is examined with a model incorporating refinements which weaken the H-O-S result that free trade can cause factor rewards to equalize. Asian growth and rising openness in the period 1970–1992, taken in isolation, are found to cause real wages to rise there, even for production workers. Although they also cause increased wage dispersion, the magnitude is small compared with the effects of skill upgrading. Projections to 2010, which combine further expansion in imports from Asia with continued Northern skill upgrading, yield declining real wages and/or unemployment for both production and farm workers. Restricting imports from Asia is found to be an ineffective response.     

Trade, FDI, and productivity convergence: A dynamic panel data approach in 25 countries

The investigation, described in the paper, included developing and implementing a dynamic panel framework to study and compare the role of trade and foreign direct investment (FDI) in long-run productivity convergence. Specifically, it employed the technique of a recently developed panel unit-root approach to examine and compare time-series behaviors of manufacturing productivity and services productivity of 25 countries from 1975 to 2004. Results indicated that long-run productivity convergence in manufacturing was trade-related as well as FDI-related. The results have also shown that grouping countries according to their trade partners tends to produce more significant evidence for productivity convergence than their FDI partners do. Furthermore, especially services sector shows no or little convergence, while the manufacturing sector shows strong evidence in favor of convergence. The findings suggest that trade and FDI matter for convergence particularly in the manufacturing productivity movement across countries but more specifically that trade proves more important in explaining long-run manufacturing productivity convergence.     

Trade and convergence between rich and developing countries: Some empirical evidence on macrodeterminants of specialization

Trade and Convergence Between Rich and Developing Countries: Some Empirical Evidence on Macrodeterminants of Specialization. —A case study is proposed considering trade of Italy with many groups of partners belonging to the EU, to the G-7, to the newly industrializing countries and to the newly exporting countries. Using panel estimation data, they reach the conclusion that standard of living convergence does not favour intraindustry trade among rich countries but it is IIT-biased when considering emerging countries like the NICs. A much more important role is played by country-relative size and price differentials and/or vertical differentiation.     

Decline in the persistence of real exchange rates,but not sufficient for purchasing power parity

The paper investigates the possibility of decline in the persistence of real exchange rates, or deviations from PPP. To this end, we test the null hypothesis of no decline in the PPP deviation persistence between two subsamples using a fractional integration framework. The test rejects the null at the 10% significance level for nine out of 17 countries, providing solid evidence for a decline in the persistence of real exchange rates. However, the decline is not sufficient for PPP, meaning we fail to reject the unit root hypothesis even in the latter period for all 17 countries. In addition, our rolling-window estimates show that the real exchange rate of many countries have experienced a sharp drop in their persistence once we use samples starting from the mid-1980s. Finally, we examine the relationship between the dynamics of PPP deviation persistence and several economic variables and confirm that the speed of convergence of PPP deviations is highly related to economic/financial integration and world economic stabilization.     

Fulfilment of purchasing power parity conditions in Africa: the differential role of CFA and non-CFA membership

The paper reports empirical evidence on the fulfilment or otherwiseof purchasing power parity (PPP) conditions in African countries,based on the popular augmented Dickey-Fuller test methodologythat is used to identify whether the nominal exchange rate andprice levels are co-integrated. The empirical analysis is basedon quarterly data for the 1980(I)-1991(IV) period for 35 Africancountries and our finding is that the PPP conditions are metin 17 countries that are almost exclusively non-CFA zone membersbut are not met in the remaining 18 countries comprising ninenon-CFA and nine CFA zone members. Given this lopsidedness inthe distribution of countries where the conditions are met ornot met between the two zones, it is inferred that certain macroeconomicfeatures common to the CFA zone members but which are generallyless pronounced in other countries might have been responsiblefor this finding. A number of such features relating to theextent of monetary growth, inflation rates, rate of depreciationof real and nominal exchange rates, domestic price variability,nominal exchange rate variability and the type of exchange ratesystem being operated were related to the tendency for PPP tobe fulfilled across countries. But, while the direction of theirobserved effects are generally as expected, the effects do notexhibit statistical significance.     

European exports and outward foreign direct investment: A dynamic panel data approach

European Exports and Outward Foreign Direct Investment: A Dynamic Panel Data Approach. — This paper implements a panel data approach for studying the determinants of and relationships between bilateral economic activities in terms of both trade and foreign direct investment between the EU member states. The familiar equation for testing the determinants of bilateral exports is reformulated to reflect recent theoretical work. It is specified as a dynamic panel data model designed to answer questions about their relationship according to changes in different exogenous determinants. Exports and stocks of outward FDI are found to be substitutes with respect to changes in transport costs and complements with respect to most of the other determinants.     

The role of comparative advantage in trade within industries: A panel data approach for the European Union

The Role of Comparative Advantage in Trade within Industries: A Panel Data Approach for the European Union. — A large share of EU member states trade is intra-industry trade (IIT) in the period 1985-1996; in particular, IIT is based on products differentiated in quality (vertical IIT). Moreover, exports from southern countries are located mainly at the lower end of the price-quality spectrum, whereas those countries with higher per capita incomes are located at the higher end. According to the vertical IIT models, we hypothesize that commercial specialization of members states over the quality spectrum within industries is explained by differences in technological, physical and human capital. The results show that comparative advantage is an important driver of the pattern of European trade within industries.     

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.