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.     

Expected purchasing power parity

Conclusions The results of this study indicate that movements in the exchange rate are determined primarily by expected purchasing power parity. Expected future wholesale and consumer prices were both significantly related to the exchange rate. The coefficients were negative and close to unity. Finally, the results imply that expected future inflation can have an impact on a country’s terms of trade.     

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.     

Food prices and long-run purchasing power parity in Africa

The purchasing power parity (PPP) theory is a cornerstone of exchange rate models in international economics. PPP is very important for two main reasons: first, it can serve as a prediction model for exchange rates, and second, it can serve as a benchmark in judging the level of exchange rate movements. This article utilised the Johansen cointegration technique in examining whether or not there is empirical support for long-run PPP in Africa. Annual data were used for exchange rates and food price indices in 25 countries covering the 1958-97 period. The empirical evidence showed strong support for long-run PPP in Africa, thereby providing wider acceptance for the applicability of PPP in exchange rate and other macroeconomic adjustment policies.     

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.     

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.     

Are deviations from purchasing power parity efficient? Some further answers

Zusammenfassung Sind Abweichungen von der Kaufkraftparit?t effizient? Einige zus?tzliche Antworten. - In diesem Aufsatz beschreibt und testet der Autor den Ansatz der effizienten M?rkte für die Kaufkraftparit?t einiger floatender Wechselkurse der Zwischenkriegszeit. Die Ergebnisse sind: (i) Die Abweichungen von der Kaufkraftparit?t in der Zwischenkriegszeit folgen nicht einem einfachen Zufallspfad, sondern eher einem Zufallspfad, der durch einen gleitenden Durchschnitt der Fehler vergangener Perioden modifiziert wird. Letzteres stützt die Ansicht, da\ die realen Zinss?tze nicht konstant sind. (ii) Die Zeitreihendarstellung realer Wechselkurse beinhaltet für zwei Devisenm?rkte, da\ es keine Parit?t gibt, zu der der reale Wechselkurs auf die Dauer hinstrebt. (iii) Best?tigt wurde auch, da\ die Fehler Orthogonalit?tseigenschaften besitzen: Die Ver?nderungen des realen Wechselkurses korrelieren nicht mit der Geldmenge und dem Einkommen im In- und Ausland.

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Resumen ?Son eficientes las desviaciones de la paridad del poder adquisitivo? Algunas respuestas adicionales. - En este trabajo el autor expone y pone a prueba empíricamente el método de mercados eficientes para modelar la PPA aplicado a la experiencia de cambios flexibles durante el período entre las dos guerras. Se concluye que (i) las desviaciones de la PPA entre las dos guerras no responden a un simple ?random walk?, sino más bien a un ?random walk? corregido por un promedio móvil; este último es indicativo de la noción de que las tasas de interés reales no son constantes, (ii) la representación del tipo de cambio real en forma de serie de tiempo implica que, en el caso de dos mercados de divisas, no hay valor de paridad hacia el cual el tipo de cambio real pueda tender a largo plazo, (iii) se ha encontrado evidencia en favor de la propiedad ortogonal de error; quedó demostrado que las variaciones del tipo de cambio real no están correladas ni con la oferta monetaria ni con el ingreso, tanto nacionales como extranjeros.

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Résumé Les déviations de la parité de pouvoir d’achat sont-elles efficientes? Quelques réponses additionnelles. - Dans cet article l’auteur a introduit et testé l’approche des marchés efficients de modeler PPA pour l’expérience inter-guerre avec des taux de change flottants. Les résultats sont: (i) Les déviations de la PPA pour la période inter-guerre ne suivent pas une simple voie aléatoire mais une voie aléatoire modifiée par un term d’ajustement moyen mobile. Une telle voie supporte la vue que les taux d’intérêt réels ne sont pas constants. (ii) La représentation des séries chronologiques pour les taux de change réels implique pour deux marchés de change qu’il n’y a pas une valeur de parité approchée à longue échéance par le taux de change réel. (iii) Les analyses supportent aussi la propriété d’orthogonalité des erreurs: les changements du taux de change réel n’étaient pas corrélés avec la monnaie et le revenu locale et étrangère.

     

基于购买力平价理论的人民币汇率的实证检验

购买力平价对人民币汇率虽然具有一定的解释作用,但有很大的局限性。汇率的变动不仅仅与物价水平相关,还与一国的生产力发展水平、利率、资本流动等其他经济变量以及该国施行的货币政策、财政政策和汇率政策有关。因此,必须对购买力平价计量检验模型进行修正,以期更好地解释人民币汇率的变化并指导其调整。     

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.     

Collapse of the purchasing power parity in the light of co-integrated variables?

Zusammenfassung Kollaps der Kaufkraftparit?tentheorie im Lichte ko-integrierter Variabler? - Dieser Aufsatz nimmt das Kaufkraftparit?tentheorem wieder auf und untersucht, (i) ob Wechselkurse (im Verh?ltnis zur Basisperiode) und die entsprechenden Preisdifferentiale ko-integriert sind und (ii) ob (au▾erdem) die Differenz zwischen den beiden Variablen station?r ist. Es wird argumentiert, da▾ die Gesamtkosten pro reale Produktionseinheit, die dem Deflator der Gesamtproduktion entsprechen, am besten geeignet sind, um die relative Wettbewerbsf?higkeit der Volkswirtschaft zu messen. Besonderer Wert wird auf den Wechselkurs der D-Mark gegenüber den anderen EWS-W?hrungen gelegt. Es wird statistisch nachgewiesen, da▾ der Logarithmus des Wechselkurses mit dem Logarithmus des entsprechenden Preisdifferentials ko-integriert ist und da▾ sich - mit einem h?heren Grad an Unsicherheit - die relative Kaufkraftparit?t bew?hrt.

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Résumé Collapsus de la parité de pouvoir d’achat en lumière des variables cointegrées? - Cet article s’occupe encore une fois de la parité de pouvoir d’achat (PPA) en analysant (i) si des taux de change (en relation à une période de base) et les différences de prix correspondantes sont co-intégrés et (ii) si (de plus) la différence des deux variables est stationnaire. L’auteur argue que les co?ts totaux par unité de la production totale qui sont identiques au déflateur de production totale sont très propres à mesurer la capacité concurrentielle relative d’une économie entière. L’attention particulière est prêtée au taux de change de la Deutschmark vis-à-vis les autres monnaies SME. Statistiquement, il est trouvé que le log du taux de change et le log de la différence de prix correspondante sont co-intégrés et que, avec un degré plus haut d’incertitude, la PPA relative est affirmée.

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Resumen ?Se derrumba la paridad del poder de compra a la luz de variables cointegradas? - Este trabajo reexamina el teorema de la paridad del poder de compra (PPP) investigando (a) si las tasas de cambio y las diferencias de precios correspondientes son cointegradas y (b) si la diferencia entre las dos variables es estacionaria. Se arguye que el costo total por unidad de producto real, igual al deflactor del producto total, se presta para medir la competitividad de la economía en su conjunto. Se enfatiza particularmente la tasa de cambio del Marco Alemán frente a otras monedas del sistema monetario europeo. Se encuentra evidencia estadística en favor de una cointegración del logaritmo de la tasa de cambio y del logaritmo de la diferencia de precios correspondiente; el teorema del PPP relativo resulta válido, mas a un nivel de incertidumbre más alto.

     

Assessing convergence to purchasing power parity: A panel study for ten OECD countries

Assessing Convergence to Purchasing Power Parity: A Panel Study for 10 OECD Countries. — The paper analyzes whether post-Bretton Woods real exchange rates of ten OECD countries are nonstationary so that long-run purchasing power parity (PPP) can be considered to hold. A test procedure is proposed which treats the various real exchange rates as a panel but still allows to assess the rate of convergence to PPP for each pair of currencies separately. It is shown that long-run (tradables-) PPP holds between all countries analyzed. Rates of convergence to PPP, however, are found to be quite different across countries. For most of the OECD countries convergence takes place faster than previously indicated.     

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.     

Generalized purchasing power parity and the case of the European Union as a successful currency area

This article uses multicountry purchasing power parity (PPP) tests to study the success of the European monetary system (EMS) in creating a successful currency area for a stable European monetary union. If the EMS has sufficiently integrated the fundamentals within the European Union, then real exchange rates between member countries will share a common stationary trend when denominated by a common outside currency. Previous research using two-country PPP tests have been inadequate in explaining the nonstationary nature of real exchange rates between the EMS countries and nonmember countries. The use of generalized PPP tests can show that even though individual exchange rates within the EMS may appear to be nonstationary with respect to outside countries, some of them will combine to form a currency union with a stable stationary trend.     

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.     

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.

     

Evidence of long-run purchasing power parity: analysis of real asian exchange rates in terms of the Japanese yen

In this paper we find strong new evidence in favour of the long-run purchasing power parity (PPP) hypothesis in the bilateral real exchange rates between the Japanese yen and the currencies of the most important southeast Asian economies only when the presence of several possible structural breaks of the series is taken into account. Such evidence for PPP is weaker for these southeast Asian exchange rates with the US dollar, the German mark and the Australian dollar.     

探析汇率制度、购买力平价及国际货币供求因素对人民币汇率的长期影响

影响人民币汇率的因素很多,但其作用时间的长短却不同。文章通过对中国的汇率制度、购买力平价及国际货币供求的分析,来说明其对汇率的长期影响。     

Purchasing power parity: Granger causality tests for the yen–dollar exchange rate

The paper analyses the causality between the Japanese prices and the yen–dollar exchange rate. It explains the long-term appreciation trend of the Japanese yen and why the Japanese yen proved strong even during the economic slump of the 1990s. The paper suggests that the appreciation of the Japanese yen forced the Japanese enterprises into price reductions and productivity increases, which put a floor under the high level of the yen and, thus, initiated rounds of appreciation. This corresponds to the conjecture of a vicious (virtuous) circle of appreciation and price adaptation. Further, there is evidence that the yen-appreciation has been accommodated by the Bank of Japan’s monetary policy. This corresponds to the conjecture that the recent Japanese deflation is imposed from outside via the exchange rate.