Buffer stocks,exchange rates and deviations from purchasing power parity

In this paper an extension of the Monetary Approach to the Exchange Rate reduced form is presented and estimated for four bilateral exchange rates with data from the recent floating experience. The extension incorporates two features: a more sophisticated modelling of money demand, using theCarr andDarby money demand specification, and allowing for deviations from purchasing power parity. The estimated results are supportive of our extended specification and we conclude by arguing that care should be taken in specifying the underlying structural relationships in asset reduced form exchange rate equations.     

Home bias and deviations from purchasing power parity

Empirical analysis has produced mixed results in testing for PPP. This note presents a simple model linking home bias towards home-produced tradable goods with deviations from absolute PPP. We show that this bias constitutes a significant determinant of PPP deviations.     

Sticky prices and purchasing power parity deviations: Empirical implications

This note tests one implication of the hypothesis that purchasing power parity (PPP) deviations are partly caused by different pricing behavior in goods and asset markets. Cross-country regressions of the variance of PPP deviations on the variance of money supply innovations support the hypothesis.     

Testing the relative purchasing power parity hypothesis: the case of Korea

This study examines the relative purchasing power parity (PPP) hypothesis using the data from the Korean won–US dollar and the Korean won–Japanese yen foreign exchange markets. We extract proxies for inflation from stock market returns of Korea, the United States and Japan based on the method used by Chowdhry, Roll and Xia in 2005. We explicitly test the relative PPP hypothesis in light of the short-run price volatility using monthly, bimonthly and quarterly data from 1 January 1998 to 31 December 2012. Our findings suggest that the empirical test results from the entire sample period do not support the relative PPP hypothesis. However, the results from the sample period excluding the Asian Financial Crisis period show that the relative PPP hypothesis holds for the Korean won–US dollar market with a moderate magnitude of inflation impact, but not for the Korean won–Japanese yen market. Abrupt changes in exchange rates during the crisis period may have affected the relationship between inflation and exchange rates. This result also suggests that factors other than inflation might have affected the Korean won–Japanese yen exchange rate.     

Examining world-wide purchasing power parity

We examine long-run PPP between Germany, Great Britain, Japan and the United States over the period 1930–1996 using multivariate cointegration techniques. Bilateral PPP between the four countries is examined in one system (as opposed to e.g. series of trivariate systems). In all of the statistical analysis, asymptotic tests are augmented by parametric bootstrap analogues, whereby we reduce, if not eliminate, the size distortion typically present in small-sample studies. The cointegration analysis provides support for the necessary conditions for PPP (i.e. cointegrating relations are found) but not for the sufficient conditions (i.e., the coefficients in the cointegrating relations are far from what PPP predicts). These results are at odds with results from other studies that also analyze long-horizon data sets.First version received: November 2000/Final version received: February 2003Comments by Stefan Norrbin, Lee Ohanian, Anders Vredin, seminar-participants at Sveriges Riksbank (the central bank of Sweden) and at the Econometric Society European Meeting in Santiago de Compostela are gratefully acknowledged.     

Re-examination of the long-run purchasing power parity: further evidence from Turkey

In this article, we re-examine the empirical validity of the Purchasing Power Parity (PPP) theory for the Turkish economy. For this purpose, an empirical model is constructed using some contemporaneous estimation techniques such as multivariate co-integration and vector error correction methodology. Our estimation results reveal that the PPP can strongly be supported as a long-run stationary steady-state relationship for the Turkish economy.     

Testing the purchasing power parity in panel data

This paper empirically tests the purchasing power parity (PPP) using panel unit root tests. We employ a battery of panel unit root tests: LM-bar statistic [Testing for unit roots in heterogeneous panels, Working paper, University of Cambridge] is employed to account for serially correlated errors. The statistic proposed by Breitung [Adv. Econom. 15 (2000) 161.] and the KPSS-based statistic of Hadri [Econ. J. 3 (2000) 148.] are also used. In addition, we also employ a SUR estimator to account for possible cross-sectional effect. Data of 45 economies from 1980 to 1999 are used to test the PPP hypothesis. We find that these estimators tend to get supportive results when the data frequency becomes lower, which substantially characterizes the long-run property of the PPP hypothesis.     

Common trends in prices and exchange rates. Tests of long-run purchasing power parity

The empirical validity of long-run purchasing power parity is investigated using multi-variate cointegration techniques. Both bilateral and multilateral PPP is examined. The data set is monthly and covers almost 22 years (January 1970–August 1991) for four countries — Germany, Japan, the U.S., and Great Britain. While three cointegrating relations are detected among the set of nominal exchange rates and domestic price levels (or equivalently, there exists a reduced number of common stochastic trends) none of these satisfy the linear constraints implied by PPP. We conclude that neither bilateral nor multilateral PPP can be supported by the behavior of the data.     

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.     

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.     

Unit roots and purchasing power parity: another kick at the can

Lopez et al. (2005 Lopez, C, Murray, C and Papell, D. 2005. State of the art unit root tests and purchasing power parity. Journal of Money, Credit and Banking, 37: 361–9. [Crossref], [Web of Science ®] , [Google Scholar]) demonstrated that single-equation unit-root tests cannot provide conclusive evidence of whether real exchange rates are stationary because inference depends critically on the lag-lengths used to construct the test statistics, a result reinforced by a recent work by Sweeney (2006 Sweeney, D. 2006. Mean reversion in nominal G-10 exchange rates. Journal of Financial and Quantitative Analysis, 41: 685–708. [Crossref], [Web of Science ®] , [Google Scholar]). The purpose of this article is to revisit the issue, first demonstrating the necessary conditions under which this approach of testing for Purchasing Power Parity (PPP) is appropriate.     

Long-run purchasing power parity with asymmetric adjustment: Further evidence from nine transition countries

In this study, we applied a threshold cointegration test to investigate the properties of asymmetric adjustment on long-run purchasing power parity (PPP) in nine transition countries between January 1995 and December 2008. Although there was strong evidence of long-run PPP for these nine transition countries (i.e., Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Russia), the adjustment mechanism was asymmetric. These results have important policy implications for the nine transition countries included in the study.     

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.     

Long-run purchasing power parity and asymmetric adjustment in BRICs

The primary aim of this study is an attempt to determine whether the Purchasing Power Parity (PPP) hypothesis holds for those countries that have collectively come to be known as ‘BRICs’, namely, Brazil, Russia, India and China. We use the momentum threshold cointegration tests (advanced by Enders and Siklos, 2001 Enders, W. and Siklos, P. L. 2001. Cointegration and threshold adjustment. Journal of Business Economics and Statistics, 19: 166–76. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) to investigate whether any asymmetric adjustment is discernible for BRICs, and show that whilst the Engle–Granger test (which assumes only symmetric adjustment) fails to reveal any cointegrational relationship for BRICs, the threshold cointegration test (with asymmetric adjustment) provides clear evidence of long-run PPP for BRICs, with the notable exception of China. We conclude that asymmetric adjustment of nominal exchange rates plays an important role in eliminating deviations from long-run PPP.     

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.     

Evidence on the purchasing power parity in a panel of cities

Evidence is provided on the PPP hypothesis using a sample of 50 Spanish cities for a long time period through the application of panel data unit root tests. Although results suggest non-rejection of the PPP, short-run deviations – as measured by half-lives – indicate that real factors might be causing a slow rate of convergence to a common price index, even in highly integrated economies.     

Examining the evidence of purchasing power parity by recursive mean adjustment

This paper revisits the empirical evidence of purchasing power parity under the current float by recursive mean adjustment (RMA) proposed by So and Shin (1999). We first report superior power of the RMA-based unit root test in finite samples relative to the conventional augmented Dickey–Fuller (ADF) test via Monte Carlo experiments for 16 linear and nonlinear autoregressive data generating processes. We find that the more powerful RMA-based unit root test rejects the null hypothesis of a unit root for 16 out of 20 current float real exchange rates relative to the US dollar, while the ADF test rejects only 5 at the 10% significance level. We also find that the computationally simple RMA-based asymptotic confidence interval can provide useful information regarding the half-life of the real exchange rate.