Testing the theory of PPP for emerging market economies that practice flexible exchange rate regimes

This study aims to test the long-run validity of purchasing power parity by using Fourier quantile unit root and Fourier cointegration analyses for 12 emerging market economies that practice a flexible exchange rate regime. With the Fourier approach, structural breaks are modelled as a gradual and smooth process. Fourier quantile unit root test results show that real exchange rate series are stationary for Colombia, India, Philippines, Poland, South Africa, and Turkey. On the other hand, Fourier cointegration test results reveal that purchasing power parity is valid for Brazil, Colombia, India, Mexico, South Africa, Thailand, and Turkey.     

Fourier nonlinear quantile unit root test and PPP in Africa

We test the PPP hypothesis in 29 African countries using a newly developed nonlinear Quantile unit root test with a Fourier function which accounts for smooth breaks. Simulation indicates that the proposed new test has higher power than the conventional Quantile unit root test as proposed by Koneker and Xiao (2004). Our empirical results provide support for the PPP hypothesis in 21 out of 29 African countries, a unique discovery using their real effective exchange rates. It appears that incorporating Fourier function to nonlinear Quantile unit root test gets us closer and closer to solving the PPP puzzle in Africa.     

Real and nominal effective exchange rates in MENA countries: 1970–2004

The main purposes of this article are 3-fold. First, we construct measures of real and nominal effective exchange rates for 14 Middle East and North African countries over the 1970–2004 period. Second, we test the validity of the Purchasing Power Parity (PPP) by applying the ADF and KPSS tests to the real effective exchange rates. Finally, we employ the bounds testing approach to cointegration and error-correction modelling to show that nominal devaluation leads to real devaluation in the short-run as well as in the long-run in many of the countries.     

The Impact of Exchange Rate Volatility on UK Exports to EU Countries

This paper investigates the impact of exchange rate volatility on UK exports to European Union (EU) countries by means of a newly developed ARDL bounds testing procedure to cointegration. Using monthly data disaggregated by market of destination and sectors for the period 1993ml to 2001m6, our results indicate that UK exports to the EU14, at both aggregate and sectoral level, are generally income elastic, relative price inelastic and largely unaffected by short‐term exchange rate volatility. Re‐estimation of the model using a long‐term measure of volatility, however, provides evidence supporting the hypothesis that exchange rate uncertainty has a negative and significant influence on UK exports to EU countries.     

Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta

A simple cointegration methodology is used to compute the equilibrium real exchange rate for the peseta. The stock of foreign assets and the evolution of sectoral prices are considered to be the fundamentals for the real exchange rate. After testing for cointegration, we proceed to decompose the series into a permanent and a transitory component, following the method devised by Gonzalo and Granger. The permanent component of the real exchange rate corresponds to its (time-varying) equilibrium value, and the deviation of the actual real exchange rate from this equilibrium value gives an estimation of the degree of misalignment of the real exchange rate. By the end of the sample (1998:1), the peseta is estimated to be undervalued around 6%.     

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.     

Does black market exchange rate volatility deter the trade flows? Iranian experience

Previous studies that investigated the impact of exchange rate volatility on the trade flows, employed official exchange rate data to construct a measure of exchange rate uncertainty. In this paper we show that in countries that there is a black market for foreign exchange, the black market exchange rate volatility could have adverse effect on the trade flows. We show this by using data from Iran and cointegration analysis.     

Long-run money demand in OECD countries: what role do common factors play?

This article examines the long-run money demand function for 11 OECD countries from 1983Q1 to 2006Q4 using panel data. The distinction between common factors and idiosyncratic components using principal component analysis allows for the detection of cross-member cointegration and the determination as to whether national or international sources are responsible for the non-stationarity of money and its determinants. Indeed, the finding that the common factors are I(1) while the idiosyncratic components are I(0) indicates that cross-member cointegration may exist and non-stationarity in the variables is primarily driven by common international trends. Furthermore, it is found that the impact of income on money demand is positive, whereas it is negative for the interest rate, exchange rate and stock prices. Except for the income elasticity of money demand, all estimated long-run coefficients are larger for the common factors of the variables than for the variables themselves. This article provides evidence that the exchange rate is an important determinant of money demand, whereas the results for the stock prices are ambiguous. Finally, the results of a panel-based error-correction model suggest that several domestic money stocks converge to a common international equilibrium relationship between the common factors.     

中国外汇储备规模与汇率关系的实证研究——基于人民币对国外主要币种汇率的分析

在目前中国外汇储备连年增长、人民币相对美元升值的背景下,运用协整、Granger因果关系检验等时间序列分析方法对外汇储备和人民币对国外主要币种汇率关系进行实证分析.研究结果表明,外汇储备与人民币对国外主要币种汇率之间不具有长期的协整性,但存在从外汇储备到人民币对国外主要币种汇率的单向因果关系.外汇储备的增长会引起人民币对国外主要币种汇率上升,短期内外汇储备的增长会对人民币汇率升值带来一定的压力.中国应考虑对人民币名义汇率的调整,从而缓解人民币的升值压力,抑制外汇储备的增长速度.     

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.     

Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?

This paper aims at studying the sustainability of current accounts in Sub-Saharan Africa and determining whether this sustainability depends on the exchange rate regime. Relying on a formal theoretical framework and recent panel cointegration techniques, our findings show that current accounts have been globally sustainable in Sub-Saharan Africa countries over the 1980–2011 period. However, this sustainability has been lower for countries operating a fixed exchange rate regime or belonging to a monetary union. We also find that the difference in the level of sustainability could be explained by a higher persistence in the current account adjustment of countries operating under rigid exchange rate regimes.     

Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation

This paper investigates the exchange rate pass-through into import prices in a sample of 24 developing countries over the period from 1980 to 2003. We estimate a pass-through equation determined by a combination of the nominal exchange rate, the price of the competing products, the exporter's costs and demand conditions. We adopt non-stationary panel estimation techniques and tests for cointegration. In the long run, homogeneity of pass-through rates across countries can be rejected. Moreover, we show that most of these differences in exchange rate pass-through into import prices are due to three macroeconomics determinants: exchange rate regimes, trade barriers and inflation regimes.     

The purchasing power parity of Southeast Asian currencies: A time-varying coefficient approach

The economies of Southeast Asia have undergone several structural changes, including the Asian currency crisis, during the post-Bretton Woods era. We use a time-varying coefficient cointegration model to test for purchasing power parity (PPP) of Southeast Asian currencies and to track changes in purchasing power relationships over time. The main empirical findings are as follows. First, the stability of the relationship between exchange rates and price differentials is strongly rejected. Second, a major structural change occurs at the outbreak of the Asian currency crisis in 1997. Third, when the cointegration vector is allowed to vary with time, we find evidence of a cointegration relationship for four countries in terms of the US dollar and for four countries in terms of the Japanese yen. Therefore, it seems unlikely that Southeast Asian currencies form a “yen bloc.”     

Is income converging in China?

This study adopts a flexible Fourier unit‐root test proposed by Enders and Lee (2012) to revisit the tendency towards convergence in real per capita income among provinces after economic reform in China. When a data‐generating process is non‐linear, a Fourier series not only allows for the possibility of an unknown number of structural breaks with unknown forms but also allows for the use of a low‐frequency component to capture multiple changes. Contrary to what the linear statistics suggest, our results from a flexible unit‐root test indicate that China's eastern and western regions are converging to their own specific steady states.     

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.     

The black market exchange rate and demand for money in sixteen developing countries

Using data for a sample of 16 diverse countries, this study tests the hypothesis that it is the black market exchange rate, not the official rate, that should enter into the demand for money function of countries where there is a black market for foreign currencies. Using several cointegration methods and Hausman tests, it is shown that this hypothesis is strongly supported for most of the countries studied.     

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.     

基本面因素与人民币汇率的协整和方差分析——基于行为均衡汇率理论

在行为均衡汇率理论的基础上,选择对美净出口额、国内生产总值、广义货币供给量和实际利率作为影响人民币汇率的基本面因素,进行协整和方差分析。协整回归结果表明:在长期,广义货币供给量和对美贸易是影响人民币汇率的两个重要因素,广义货币供给量的弹性大于对美贸易量的弹性。但方差分析结果显示:对美贸易量对人民币汇率的贡献程度却大于广义货币供给量对人民币汇率的贡献程度。     

Measuring international competitiveness: experience from East Asia

This paper uses a new measure of real exchange rates as an indicator of international competitiveness. This new measure involves defining all prices and exchange rates on an appropriately weighted basket of currencies rather than a single currency. The measure is applied to the data for Japan, Korea, Thailand, Malaysia and Singapore. For comparison purposes, we calculate real exchange rates based on purchasing power parity (PPP) for these countries. To check for the relative performance of the two measures, cointegration tests are employed. The results indicate that the new measure tends to be closely related with the export growth for the sample countries, while the PPP-based measure is not. Moreover, the PPP-based real exchange rates tend to understate the measures of competitiveness for these countries. This result has important implications in terms of the levels of these countries' exchange rates as well as the well-known Balassa hypothesis.     

The monetary approach to exchange rates in the CEECs1

A panel dataset for six Central and Eastern European countries (Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) is used to estimate the monetary exchange rate model with panel cointegration methods, including the Pooled Mean Group estimator, the Fully Modified Least Square estimator and the Dynamic Least Square estimator. The monetary model is able to convincingly explain the long‐run exchange rate relationships of a group of CEECs, particularly when this is supplemented by a Balassa–Samuelson effect. Our estimated long‐run monetary equations are used to compute equilibrium exchange rates. Finally, we discuss the implications for the accession of selected countries to the European Economic and Monetary Union.