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.     

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.     

Cointegration tests of purchasing power parity

Im et al. (Unpublished working paper, 2008) develop cointegration tests using stationary instrumental variables. Their tests avoid the need to simulate critical values for the cointegration estimations, especially problematic in the presence of a nuisance parameter. Likewise, bootstrapping errors is unnecessary. Using an updated version of the Taylor (Rev Econ Stat 84(1):139–150, 2002) data set, the Im et al. (Unpublished working paper, 2008) approach is applied to two well-known, single equation cointegration methods to test for purchasing power parity. The estimations with instruments provide evidence of purchasing power parity (PPP) for more than half of the countries studied; but the empirical results, hence conclusions regarding PPP sometimes differ with the choice of instrument.     

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.     

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.     

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.     

Testing purchasing power parity for Japan and the US: A structural-break approach

In this work we empirically assess the weak and strong forms of purchasing power parity (PPP) hypothesis for the economies of Japan and US. Monthly data for the, traded-goods price indices and the JPY/USD exchange rate are employed for the, period from January 2000 to October 2012. This period includes large shocks, such as, the US subprime crisis and the 2011 Tsunami in Japan. We take into account possible, structural shifts and breaks by employing the class of Lee and Strazicich, 2003, Lee and Strazicich, 2004 unit, root tests. Empirical analysis suggests that a break corresponding to the start of the US subprime crisis is not rejected. Furthermore, utilizing the Gregory and Hansen (1996) and, Hatemi (2008) cointegration methodologies, the weak form of PPP is not rejected. We, also test the strong PPP hypothesis by using Dynamic Ordinary Least Squares, (DOLS). The empirical evidence rejects the strong form of PPP for the period, preceding the US subprime crisis in contrast to the period after.     

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。     

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.     

Does purchasing power parity survive political shocks in South Africa?

Does Purchasing Power Parity Survive Political Shocks in South Africa? — The objectives of the paper are to examine the Purchasing Power Parity (PPP) hypothesis for the South African economy during the period 1975–1994 using high-frequency data. The analysis is conducted both for the entire period and also for different subperiods in order to take into account possible structural changes. For the rand/ dollar exchange rate, the authors find on the basis of a unique long-run cointegrating relationship that there is significant evidence supporting the PPP hypothesis for the entire period. The use of nonlinear least squares and Johansen-Juselius procedures is made to reach the above conclusion.     

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.

     

The Balassa–Samuelson model of purchasing power parity and Chinese exchange rates

Our principal purpose here is to assess the extent to which both the official and black market exchange rates for the Chinese economy exhibit compatibility with the Balassa–Samuelson model over the period from 1985 to 2006. We employ annual measures of inflation and industry input on an aggregated, disaggregated and sector basis, all of which have been especially constructed for this study. Both the time series and panel cointegration tests applied to this data are generally inconsistent with the prediction of the Balassa–Samuelson model that the tradable goods sector is compatible with purchasing power parity. However, our analysis also shows that other predictions of the Balassa–Samuelson model – most notably that there will be a strong long-run relationship between the real exchange rate and the relative productivity differential between China and the U.S. – does hold up for the Chinese economy. Moreover, the black market exchange rate appears to be more consistent with the predictions of the Balassa–Samuelson model than the official exchange rate.     

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.

     

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.