PURCHASING POWER PARITY WITH RANK TESTS FOR NONLINEAR COINTEGRATION IN AFRICAN COUNTRIES

This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for 20 African countries. We find that a nonparametric rank test has higher power than parametric testing procedures; a true data‐generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of purchasing power parity (PPP) from the nonparametric nonlinear point of view and provide robust evidence that clearly indicates PPP holds true for these countries. Hence, the long‐run African countries exchange rate adjustments are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis in a nonlinear way.     

DO AFRICAN COUNTRIES MOVE ASYMMETRICALLY TOWARDS PURCHASING POWER PARITY?

This paper investigates the possibility that the adjustment towards long‐run relative purchasing power parity (PPP) is dependent upon the nature of deviations from PPP that are experienced. While existing studies involving developed and less developed countries often find against PPP having employed linear tests of non‐stationarity or non‐cointegration, we employ a new cointegration test, recently advocated by Enders and Siklos and Enders and Dibooglu, that tests for an asymmetric adjustment towards parity with respect to positive and negative deviations of the real exchange rate from its equilibrium value. Using a sample often African economies with data taken from the post‐Bretton Woods floating exchange rate era, long‐run PPP holds in eight of these cases if an explicit distinction is made between positive and negative deviations. Across the sample, we find variation in the type of asymmetry experienced and the roles played by price and nominal exchange rate adjustment.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: FURTHER EVIDENCE FROM FOURIER UNIT ROOT TESTS BASED ON LINEAR AND NONLINEAR MODELS

This paper examines the validity of purchasing power parity hypothesis for 33 African countries using recently developed Fourier unit root tests by Christopoulos and León‐Ledesma that account for the existence of multiple breaks in the real exchange rates. The results support the evidence of the PPP in 20 countries, showing that most of the real exchange rates in the selected countries are characterised by linear or nonlinear stationary around multiple temporary mean changes.     

Testing price-exchange rate noncausality: Results from a vector error correction model

Previous tests of the martingale property of the exchange rate have examined the random walk property of the exchange rate or have tested for Granger causality of the exchange rate by macroeconomic variables. Interestingly, if purchasing power parity (PPP) holds in the long run, causality tests should be conducted by estimating a vector error correction model which includes price levels. This paper conducts exchange rate causality tests employing vector error correction models and finds evidence that the Swiss exchange rate is Granger caused by lagged deviations in PPP and, hence, is Granger caused by prices.     

Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC

The aim of this paper is to find some empirical evidence on Purchasing Power Parity (PPP) and Uncovered Interest Parity (UIP) in the Spanish case vis à vis the European Community for the period 1980–89. The main contribution of the paper is the aggregation of the variables corresponding to the countries that participate in the exchange rate mechanism of the European Monetary System. The results support the importance of the interest differential as an explanatory variable for the short-term adjustment to the PPP. The results follow from powerful estimation techniques, applied in the framework of a multivariate error-correction model using the maximum-likelihood procedure as developed by Johansen and Juselius (1992).     

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.     

Purchasing Power Parity: Error Correction Models and Structural Breaks

This paper examines purchasing power parity (PPP) behavior using error correction models (ECM) and allowing for structural breaks. We distinguish four different objectives: first, this paper examines which variable or variables (the exchange rate and/or international relative prices) exhibit a significant error correction mechanism. Second, this paper presents empirical evidence about the adjustment velocity to the long-run equilibrium. Third, it examines the evidence regarding cointegration and the adjustment coefficients parameter instability, and finally, it analyzes whether traded and non-traded sectors exhibit different behavior. The most important results are: (1) the predominant adjustment is in the exchange rate with a larger velocity adjustment than in relative prices; (2) the evidence suggests that when there are strong depreciations or appreciations in the exchange rate, the international relative prices adjust (i.e., there is evidence of pass-through); (3) the dynamic adjustment to equilibrium is, in general, stable.     

Sign predictions of exchange rate changes: Charts as proxies for Bayesian inferences

Sign Predictions of Exchange Rate Changes: Charts as Proxies for Bayesian Inferences. - One recurrent and controversial feature of high-frequency exchange rate returns is the apparent profitability of simple chartist rules. This paper attests the relevance of these rules for predicting the upward and downward tendencies in speculative prices. First, it is shown by means of a variant to the standard Markov switching model that there are swings in the mean for various weekly exchange rate returns. The paper proceeds by showing that certain chartist rules detect these regime shifts quite accurately. As such, these rules can be interpreted as workable proxies for the Bayesian filtering rule of Hamilton.     

Bayesian analysis of a Markov switching temporal cointegration model

This paper introduces a Bayesian approach to a Markov switching cointegration model that allows the cointegration relationships to be switched on and off depending on the regime. Unlike a classical method for nonlinear cointegration model that uses the cointegrating vector based on a linear cointegration model, the proposed Bayesian method allows for estimation of the cointegrating vector within a nonlinear framework conditional on the regime variables through the Gibbs sampling so that it generates more reliable estimation. The Bayes factors are applied to test for Markov switching and model specifications. The purchasing power parity (PPP) relationship between UK and US is investigated using the proposed model for illustration.     

Testing for the uncovered interest parity condition in a small open economy: A state space modelling approach

Do interest rate differentials smoothly mirror the changes in the exchange rate between a small open economy and a large emerging market economy? The literature provides conflicting views on the validity of the uncovered interest parity condition (UIP), including its size and factors influencing the risk premium. We examine the validity of the UIP condition between Nepal and India using time-series data covering the period 1989 – 2019. A state space modelling approach based on the Kalman filter analysis is applied to simulate the risk premium. We find that the UIP condition does not hold for the Nepalese Rupee. A time-varying persistent negative risk premium that dominantly explains interest rate differentials is, instead, found. These findings imply that Nepalese residents prefer to hold foreign assets and continually expect future devaluations of the domestic currency. These present obstacles to developing domestic financial markets and the implementation of a market oriented monetary policy.     

TESTING FOR PPP USING SADC REAL EXCHANGE RATES

This paper attempts to provide evidence indicating that the purchasing power parity (PPP) puzzle is becoming less of a puzzle. It present the results of Augmented Dickey–Fuller test, non-linear tests of non-stationarity and Bayesian unit root tests, applied to 10 Southern African Development Community countries. The Bayesian tests were found to be biased in favour of a trend stationary model in all cases. It is argued that non-linear approaches to exchange rate adjustments are likely to provide a firmer basis for inference and stronger support for the PPP in the long-term. This is more so at 1 and 5% levels of significance.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: EVIDENCE FROM PANEL SURADF TEST

This study reexamines the validity of long-run purchasing power parity (PPP) hypothesis using a battery of panel unit root tests for 11 developing countries in Africa over the period 1980-2007. Based on the conventional panel unit root tests, we found evidence that the monthly real exchange rates in these countries were mean reverting. By contrast, the series-specific unit root test proposed by Breuer et al. (SURADF) reveals that only six of the 11 RERs series were stationary using the US dollar as reference currency. Additionally, our results reveal that there is stronger evidence of the parity condition with the Rand-based rates than in the other currency-based rates like the US dollar or Euro. We conclude that PPP holds in some, but not all, of the African countries according to the SURADF tests.     

TAKING THE PUZZLE OUT OF THE PURCHASING POWER PARITY PUZZLE: AN APPLICATION IN RESPECT OF SOUTH AFRICA

This paper discusses two versions of the purchasing power parity puzzle. It presents the results of nonlinearity and nonstationarity tests in respect of the real exchange rates of the rand. It is found that the rand real exchange rate behaviour tends to be nonlinear and stationary in a majority of cases in the sample. This suggests that for the majority of the currencies in the sample, the real exchange rates of the rand are mean‐reverting, implying that the purchasing power parity relation holds in a nonlinear manner.     

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.     

EVIDENCE OF PURCHASING POWER PARITY IN SILVER‐BACKED MEXICO AND INDIA

This paper examines whether the theory of purchasing power parity (PPP) existed between Mexico and India for the period 1886–1910. It finds that despite not having a known trade relationship, PPP did hold. The explanation lies in the fact that these very different countries adhered to the silver standard far longer than most others – India through to 1893 and Mexico until 1905. The economic consequences of this adherence exposed both countries to similar international currency fluctuations that also provoked similar policy reactions within each country.     

THE ARGENTINEAN CURRENCY CRISIS: A MARKOV‐SWITCHING MODEL ESTIMATION

In 2002, the Argentinean currency board came to a sudden and dramatic end. Although the country had been suffering from weak economic fundamentals for years, the timing and severity of the currency crisis surprised most observers. The present study analyzes the role of fundamentals and self‐fulfilling speculation in the Argentinean crisis. Arguing within a theoretical model of a fixed exchange rate system that allows for multiple equilibria, we show that the crisis, although associated with weak fundamentals, cannot be explained by these macroeconomic factors alone. Estimating a univariate Markov‐switching model, the current study shows that shifts in agents’ beliefs did indeed also play a crucial role.     

Monetary policy and inflation in South Africa: A VECM augmented with foreign variables

We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, known as an augmented VECM or VECX*, suitable for a small open economy like South Africa. This model is novel for South Africa in two ways: it is the first VECX* developed to analyse monetary policy and the first model that uses time‐varying trade weights to create the foreign series. We impose three significant long‐run relations (augmented purchasing power parity, uncovered interest parity and Fisher parity) to investigate the effect of a monetary policy shock on inflation. The results suggest the effective transmission of monetary policy.     

Modeling the Behavior of the KRW/USD Exchange Rate and Policy Implications

Abstract

This paper examines the behavior of the KRW/USD exchange rate based on four major models. Using the mean absolute percent error (MAPE) as the criterion, the purchasing power parity (PPP) model using the relative producer price index (PPI) performs the best, followed by the extended investment saving-liquidity preference money supply (IS-LM) model, the Frankel model, the purchasing power parity model based on the relative consumer price index (CPI), the Dornbusch model, the Frenkel model, and the uncovered interest parity model. The generalized Box–Cox model indicates that the log-log form for the PPP model can be rejected.     

人民币汇率与购买力平价假说

长期以来,购买力平价（以下简称PPP）被视为衡量货币间相对价值的最终标尺。对其实证检验的发展一直伴随着计量经济学的发展,采用的检验技术不断更新。从最开始的简单方程形式检验,到单位根检验与协整检验,直至现在的非线性检验。在本文的传统PPP模型检验中,结果显示,不论在单变量、双变量还是三变量模型的检验结果中,购买力平价都不适用于人民币兑美元汇率。     

Is reversion to PPP in euro exchange rates non-linear?

The paper tests for nonlinearities in the adjustment of the euro exchange rate towards purchasing power parity (PPP). It presents new survey based evidence consistent with non-linear patterns in euro exchange rate dynamics. Moreover, based on an exponential smooth transition autoregressive (ESTAR-) model, it finds strong evidence that the speed of mean reversion in euro exchange rates increases non-linearly with the magnitude of the PPP deviation. Accordingly, while the euro real exchange rate can be well approximated by a random walk if PPP deviations are small, in periods of significant deviations, gravitational forces are set to take root and bring the exchange rate back towards its long-term trend. Deviations from the PPP equilibrium for the euro-dollar rate need to be stronger in order to reach the same adjustment intensity as for other rates.