Testing a theoretical model of mortgage demand on UK data

This study explores whether the long-run purchasing power parity (PPP) hypothesis holds for selected real exchange rates from Turkish economy during the period 1982M1–2003M12. In addition to conventional unit root tests, five different unit root test procedures have been applied including efficient point-optimal tests, extended M tests and GLS-detrended variants of DF tests, to four monthly real exchange rate series defined in terms of both producer and consumer price indices. The countries analysed are the USA, the UK, Germany and Italy which are major trade partners of Turkey. Mixed evidence is found for the long-run PPP hypothesis when real exchange rate is defined in terms of German DM and Italian Lira. However, the empirical analysis reveals that the PPP hypothesis holds strongly in the long-run for the UK£ and US$ based real exchange rates series using either PPI or CPI. In corroboration with other studies in the literature, the bias correlated half-life estimates suggest relatively faster speeds of adjustment supporting the view that the deviations from the PPP rate dissipate rather quickly for relatively high inflation countries.     

Sticky prices and purchasing power parity deviations: Empirical implications

This note tests one implication of the hypothesis that purchasing power parity (PPP) deviations are partly caused by different pricing behavior in goods and asset markets. Cross-country regressions of the variance of PPP deviations on the variance of money supply innovations support the hypothesis.     

Half-lives of Deviations from PPP: Contrasting Traded and Nontraded Components of Consumption Baskets

The paper examines the convergence question by contrasting the half‐lives of deviations from purchasing power parity (PPP) across traded and nontraded goods in an exchange rate model with sticky prices. In particular, empirical results show that in most cases the half‐lives of PPP deviations for traded goods are shorter than those for total consumption and for nontraded goods.     

Decomposing the persistence of real exchange rates

We propose a new methodology for decomposing the persistence of deviations from purchasing power parity (PPP). By directly comparing the impulse response function (IRF) of a vector autoregressive (VAR) model, where the real exchange rate is Granger caused by a set of candidate variables, with the IRF of the equivalent ARMA model for the real exchange rate, we capture the effects of the Granger-causing variables on the half-life of deviations from PPP. Our empirical results for a set of 20 industrial countries suggest that on average around 50% of the persistence of real exchange rates can be attributed to nominal interest rate differentials, inflation differentials and relative business cycle position with the numenaire country. Finally, we provide confidence intervals for the contributions of the aforementioned variables to the persistence of deviations from PPP by means of Monte Carlo simulations.     

购买力平价偏离理论综述

购买力平价说是一种基本的汇率决定理论,但影响购买力平价关系成立的短期或长期经济因素众多,从而使得实际汇率经常偏离平价关系.本文对有关文献中各种购买力平价偏离模型进行了综合分析,阐明了生产率、政府支出、货币供给、偏好需求和定价策略等基本因素作用于实际汇率的经济机制.     

The Balassa-Samuelson Model: A General-Equilibrium Appraisal*

We derive two key propositions of the Balassa-Samuelson model as long-run balanced growth implications of a neoclassical general equilibrium model. the propositions are that productivity differentials determine international differences in nontradable relative prices and deviations from PPP reflect differences in nontradable prices. Closed-form solutions are obtained and tested using panel methods applied to long-run components of OECD sectoral data computed using the Hodrick-Prescott filter. the results indicate that labor productivity differentials help explain international low-frequency differences in relative prices. However, predicted nontradable relative prices are less successful in explaining long-run deviations from PPP. Unless very sophisticated indeed, PPP is a misleadingly pretentious doctrine, promising us what is rare in economics, detailed numerical predictions. (Paul A. Samuelson, 1964, p. 153)     

Threshold cointegration and purchasing power parity in the pacific nations

The paper uses a threshold cointegration methodology to explore the properties of long-run purchasing power parity (PPP) in the Pacific nations. Using Japan and the USA as base countries, it is shown that long-run PPP holds for most Asian countries but that the adjustment mechanism is asymmetric. In contrast to symmetric error-correction models, it is found that asymmetric adjustments of nominal exchange rates play an important role in eliminating deviations from long-run PPP.     

Nonlinearity and Persistence in PPP: Does Controlling for Nonlinearity Solve the PPP Puzzle?

We suggest half-life measures conditional on various regimes to examine persistence in the purchasing power parity (PPP) relations within nonlinear exponential smooth transition autoregressive (ESTAR) models. We use normal sampling and simulated confidence intervals for the regime-dependent half-lives. Statistical testing and simulations suggest that the regime-dependent half-lives work well in characterizing the persistence of departures from PPP in ESTAR models. The analysis reveals considerable persistence in PPP deviations and variation in persistence across currency groups and over time. Findings in the paper suggest that incorporating nonlinearities into PPP may not necessarily solve the PPP puzzle as claimed in some recent studies.     

DOES ‘AGGREGATION BIAS’ EXPLAIN THE PPP PUZZLE?

Abstract. Recently, Jean Imbs and colleagues have claimed that much of the purchasing power parity puzzle can be explained by ‘aggregation bias’. This paper re‐examines aggregation bias. It clarifies the meaning of aggregation bias and its applicability to the PPP puzzle; demonstrates that the size of the ‘bias’ is much smaller than suggested if explosive roots in the simulations are ruled out; and shows that the presence of non‐persistent measurement error data can make price series appear less persistent than they are. After correcting for small‐sample bias, half‐life estimates indicate that heterogeneity and aggregation bias do not help to solve the PPP puzzle.     

The process followed by PPP data. On the properties of linearity tests

Recent research has reported the lack of correct size in stationarity test for PPP deviations within a linear framework. However, theoretically well motivated non-linear models, such as the ESTAR, appear to parsimoniously fit the PPP data and provide an explanation for the PPP ‘puzzle’. Employing Monte Carlo experiments the size and power of the non-linear tests are analysed against a variety of nonstationary hypotheses. Aslo the ESTAR model is fitted to data from high inflation economies. The results provide further support for ESTAR specification.     

The law of one price: conditional convergence evidence from disaggregated data

This article contributes to the literature on the Law of One Price (LOP) and absolute Purchasing Power Parity (PPP) in two ways. First, it uses a novel set of PPP data from the International Comparison Programme for OECD countries and 195 internationally comparable products from 1980 to 1996. Second, it derives and applies a test of conditional σ-convergence, which does not require long-time spans or high frequency data. Between 1990 and 1996 for 10 out of 23 countries, a significant reduction in the variance of the deviations from LOP is found for tradeables, but none in case of nontradeables. For the former, the deviations from LOP close out at half-lives between 2.2 and 6.3 years. However, there are also persistent country-specific deviations from LOP parities.     

Evidence on the purchasing power parity in a panel of cities

Evidence is provided on the PPP hypothesis using a sample of 50 Spanish cities for a long time period through the application of panel data unit root tests. Although results suggest non-rejection of the PPP, short-run deviations – as measured by half-lives – indicate that real factors might be causing a slow rate of convergence to a common price index, even in highly integrated economies.     

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.     

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.     

PPP in the medium run: The case of Norway

Existing studies generally reject purchasing power parity (PPP) on data sets from countries that have been affected by large real shocks, including Norway. However, we offer strong evidence of PPP between Norway and its trading partners during the post-Bretton Woods period, in which the Norwegian economy has experienced numerous real shocks such as discoveries of large petroleum reserves and oil price shocks. In particular, the behavior of the Norwegian real and nominal exchange rates appears remarkably consistent with the PPP theory. Moreover, convergence towards PPP is relatively rapid; the half-life of a deviation from parity is just about 1.5 years. We show that such deviations are primarily eliminated by adjustments in the nominal exchange rate and we offer some explanations for the relatively rapid convergence towards PPP.     

Inflation targeting and real exchange rates: A bias correction approach

This paper examines whether inflation targeting (IT) influences purchasing power parity (PPP) by a bias correction approach under cross-sectional dependence. The recursive mean adjustment (RMA) method proposed by So and Shin (1999) and Shin and So (2001) is employed to correct a downward bias in half-life estimates of real exchange rates. More importantly, the empirical results show that IT lowers variability of real exchange rates and plays an important role in providing favorable evidence for 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.     

The real exchange rate,regime changes and volatility shifts

We make use of a data-set with both long span and high frequency to test for purchasing power parity (PPP) while allowing for a structural shift in the volatility of the Mexico–US bilateral real exchange rate (RER). The Kim, Leybourne and Newbold (2002) unit root test, robust to changes in the innovation variance, indicates mean stationarity of the monthly RER, and hence evidence of PPP, for the full sample, 1930–2012, and various subsamples. The persistence of deviations of the real rate from its PPP level as measured by half-lives ranges from 1.37 to 2.41 years.     

Long-run purchasing power parity revisited: a Monte Carlo simulation

The existence of long-run purchasing power parity (PPP) implies that a cointegration vector of nominal exchange rate, domestic price, and foreign price is expected regardless of using the Engle-Granger two-step method or Johansen maximum likelihood approach. However, this paper has found conflicting results: the Engle-Granger technique tends to reject the long-run PPP hypothesis whereas the Johansen method is generally supportive of long-run PPP. Via Monte Carlo simulations, the present paper finds that the Johansen approach has a bias toward supporting long-run PPP especially under the circumstances in which the assumption of normally or/and independently and identically distributed disturbance terms is violated.     

Purchasing Power Parity and aggregation bias for a developing country: The case of Mexico

This paper investigates long-run Purchasing Power Parity (PPP) between the US and Mexico. We use a panel of disaggregated price data between the US and Mexico with a long time series to look at two types of aggregation bias. The first is examined in Imbs et al. — which we refer to as estimator aggregation bias — and the second is put forth by Broda and Weinstein — hereafter, data aggregation bias. The findings indicate substantial estimator aggregation bias and data aggregation bias. Although estimates using aggregate data and imposing homogeneous coefficients provide little evidence of PPP, findings with disaggregated data and heterogeneous coefficient estimators offer strong support. The results also suggest the presence of small-sample bias as examined in Chen and Engel, but with little effect on the qualitative results. Tradable goods and non-tradable goods show little distinction in convergence rates. Estimated half-lives are lower under flexible than fixed exchange rates and indicate rapid convergence during the Mexican peso crisis.