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 uncovered interest parity: The Spanish case

This paper examines whether the purchasing power parity (PPP) hypothesis holds in the long run when traded and non-traded goods are distinguished. Moreover, this hypothesis is analyzed jointly with the uncovered interest parity (UIP). The period from January 1986 to December 1995 was studied using monthly data corresponding to the consumer price index, short- and long-term interest rates, and spot exchange rates for Portugal, France, Italy, Germany, and Great Britain with each relative to Spain. Using Johansen's multi-equational cointegration technique, it was found that PPP does not hold even with the explicit consideration of the distinction between traded and non-traded goods as well as the difference between domestic and foreign interest rates. Furthermore, these two factors generate a systematic deviation between exchange rates and PPP.     

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.     

Purchasing power parity and relative price variability: Evidence from the 1970s

One curious fact to emerge from the return to flexible exchange rates in the 1970s was the failure of empirical tests of simple versions of the purchasing power parity (PPP) doctrine. This paper seeks to establish whether that observed poor performance of PPP can be attributed to uncertainty regarding the rate of inflation due to the large variations in relative prices experienced during the 1970s. The evidence is found to be unsupportive of the notion.     

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.     

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.     

Purchasing power parity over two centuries: trends and nonlinearity

In two recent contributions Lothian and Taylor, and Cuddington and Liang, produced empirical evidence that annual data for the dollar-sterling real exchange rate spanning two centuries exhibited a non-linear deterministic trend. This trend could be proxying Harrod-Balassa-Samuelson effects. Lothian and Taylor showed that a linear stationary autoregressive mode, which embodied a cubic trend, implied much faster mean reversion of the real exchange rate to shocks than a model that excluded the trend. This article shows that both non-linearity and a deterministic trend can be allowed for in a theoretically appealing manner and that the fitted models provide a parsimonious explanation of both the dollar-sterling and franc-sterling real exchange rates over the two centuries of data. Generalized impulse response function analysis of the models demonstrates that the speed of adjustment to shocks can be even faster when trends are considered.     

Purchasing power parity revisited: evidence from old and new tests for an organisation for economic co-operation and development panel

The objective of this article is to study long-run Purchasing Power Parity (PPP) for a panel of 21 Organisation for Economic Co-operation and Development (OECD) countries from the end of the Bretton Woods era by applying a wide range of the econometric techniques available. This will allow us to present a comprehensive up to date examination of the empirical validity of PPP, covering the weak and strong versions of the hypothesis with individual and panel analysis, including the absence or presence of cross-dependency, the linear or nonlinear behaviour of the real exchange rates and the degree of persistence. Overall, the results provide evidence in favour of PPP.     

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.     

Purchasing power parity across Mexican cities: a panel data analysis

This article presents three different unit root tests for panel data, the main objective is to find the level of internal integration market through the purchasing power parity (PPP) evidence, based in the Balassa–Samuelson approach. Thus, eight kinds of markets, as tradable and nontradable goods for 16 main Mexican cities during a 21 year period have been contrasted. While two tests showed the PPP validity for seven markets, the other rejected it. The results obtained moreover feed the present controversy about which test is most appropriate to test the PPP, as soon as it is highlighted new elements emerge to explain the half-life analysis.     

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 East-Asia countries: further evidence based on panel stationary test with multiple structural breaks

In this article, we re-investigate the validity of Purchasing Power Parity (PPP) for a sample of 10 East-Asia countries over the period of January 1987 to June 2005, using a recently developed econometric technique of the panel stationary test with multiple structural breaks, proposed by Carrion-i-Silvestre et al. (2005 Carrion-i-Silvestre, JL, Del Barrio, T and López-Bazo, E. 2005. Breaking the panels: an application to the GDP per capita. Econometrics Journal, 8: 159–75. [Crossref], [Web of Science ®] , [Google Scholar]). This test considers multiple structural breaks positioned at different unknown dates and a different number of breaks for each individual. Empirical evidence shows that the PPP holds true for half of 10 East-Asia countries during the research period. Our results have important policy implications for these 10 East-Asia countries under study.     

Purchasing power parity as an approximation to the equilibrium exchange ratio

Purchasing power parity (PPP) is re-examined in models with trade impediments and intermediate products that are not traded. A distinction is made between ‘local consumption PPP’ and ‘total consumption PPP’. These are tested on several data sets, with largely negative results.     

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.     

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.     

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.     

Purchasing power parity with flexible Fourier stationary test for Central and Eastern European countries

This study applies stationary test with a Fourier function proposed by Enders and Lee (2004, 2009) to test the validity of long-run Purchasing Power Parity (PPP) to assess the nonstationary properties of the Real Exchange Rate (RER) for seven Central and Eastern European Countries (CEECs). We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true data generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of PPP from the nonlinear point of view and provide robust evidence clearly indicating that the PPP holds true for all CEECs. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.