Purchasing power parity: Modeling and testing mean reversion

A model of mean reversion of exchange rates to purchasing power parity is developed and tested where exchange rates are assumed to follow a mean reverting elastic random walk toward a stochastic PPP rate. The model recognizes the possibility that mean reversion towards PPP may be nonlinear which allows greater flexibility in the adjustment process. Regression equations consistent with the theoretical model are derived. The model is tested using long- and short-term data for six countries. While the results are generally consistent with the findings of previous studies, evidence is presented which demonstrates that the mean reversion process is not linear for some countries.     

Purchasing power parity, unit roots, and dynamic structure

Recent studies of purchasing power parity (PPP) account for the possible presence of unit roots in nominal exchange rates and relative price indices by applying standard unit-root tests to real exchange rates, which are ratios of nominal exchange rates and relative price indices. These studies occasionally find evidence of PPP, but as a whole, the evidence is not definitive. Standard unit-root tests impose a restrictive dynamic structure between nominal exchange rates and relative price indices. I specify and estimate a generalized dynamic structure. I reject the dynamic restrictions implicit in standard unit-root tests of PPP, and find stronger evidence of PPP than do most other recent studies.     

Purchasing power parity in ASEAN-5 countries: revisit with cross-sectional dependence and structural breaks

This paper re-examines the purchasing power parity (PPP) hypothesis for a panel of ASEAN-5 countries. The panel unit root and cointegration tests, which incorporate cross-sectional dependence and multiple structural breaks, are innovatively used for testing the PPP hypothesis. We could not find evidence that supports the existence of a long-run equilibrium between the relative price ratio and the nominal exchange rate for the whole period. Nevertheless, there is evidence of a cointegrating relationship for the post-crisis period. Our finding implies that a flexible exchange rate regime is suitable for the individual ASEAN countries.     

Purchasing power parity and the behavior of prices and nominal exchange rates across exchange-rate regimes

The evidence presented in this paper shows that purchasing power parity as a long-run proposition is indeed a very useful approximation. We see this quite clearly in the panel data for three historical periods examined here – the classical gold standard era from 1870 to 1914, the interwar period from 1921 to 1939, and the period after World War II from 1959 to 1998. Price-level behavior across countries differs in the way that PPP suggests when monetary arrangements differ and is highly similar when monetary arrangements are themselves similar. Inflation rates adjusted for exchange rate changes in general are highly correlated and bear a one-to-one relation to one another within and across the three periods and the varied monetary regimes that prevailed.     

A re-examination on dissecting the purchasing power parity puzzle

The purpose of this paper is to examine the source of a real exchange-rate adjustment based on the impulse-response function constructed from local projections when the true data-generating process (DGP) is unknown. This work extends the local-projection method proposed by Jordà [2005. Estimation and inference of impulse responses by local projections. American Economic Review 95, 161-182] to allow for variables that are I(1) and exhibit cointegration. Our paper shows that nominal exchange-rate adjustments dominate in the reversion toward PPP regardless of a nominal exchange-rate shock or a price shock. It is also shown that the half-life of real exchange rates is close to that of nominal exchange rates. Since these results are consistent with those of Cheung et al. [Cheung, Y.W., Lai, K.S., Bergman, M., 2004. Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments. Journal of International Economics 64, 135-150], we therefore conclude that their main findings are robust to possible misspecifications in the true DGP.     

The availability of information and the accumulation of experience as motors for the diffusion of budgetary control: the French experience from the 1920s to the 1960s

Budgetary control has developed in France since the 1930s. If the initial importation from the United States was rapid, subsequent development was slow. Diffusion of the technique occurred through a number of mechanisms: professional reviews, books, consultants, think tanks, and through experiences originating in the public sector. The particular experiences of other organizations often served as reference points. In comparison with other European countries, the awareness of budgetary control in France was high, but the method was practised in only a few enterprises. The common link for these firms was their interconnection via an information network which ensured the promotion of this new management technique. The supply of information seems to have been a more important factor in the development process than the search for a rational solution to business problems.     

A century of purchasing power parity confirmed: The role of nonlinearity

Taylor (2002) claims that Purchasing Power Parity (PPP) has held over the 20th century based on strong evidence of stationary for century-long real exchange rates for 20 countries. Lopez et al. (2005), however, found much weaker evidence of PPP with alternative lag selection methods. We reevaluate Taylor’s claim by implementing a recently developed nonlinear unit root test by Park and Shintani (2005). We find strong evidence of nonlinear mean-reversion in real exchange rates that confirms Taylor’s claim. We also find a possible misspecification problem in using the ESTAR model that may not be detected with Taylor-approximation based tests.     

A test of purchasing power parity for emerging economies

The concept of purchasing power parity (PPP) is examined here for its applicability to the soft currencies of a large group of emerging/developing economies. PPP is tested through the use of the technique of cointegration. Based on data covering the period of 1975–1997, cointegration tests of price indices and exchange rates are conducted for 27 countries (against the U. S.). The results provide relatively strong evidence (for 14 countries) in favor of the long-term applicability of PPP as a cointegration concept. Further tests on real exchange rates indicate that the symmetry and proportionality conditions implied by PPP are rejected in all but one case. The latter tests also show that departures from long-term exchange values can last for several years and that a priori restrictions imposed on the cointegrating vector can lead to a false rejection of the PPP concept.     

Local banking panics of the 1920s: Identification and determinants

Using a newly discovered dataset of U.S. bank suspensions from 1921 to 1929, we discovered that banking panics were more common in the 1920s than had been believed. Besides identifying panics, we investigate their determinants, finding that local banking panics were more likely when fundamental economic conditions were generally weak and more likely in “overbanked” states; they were less likely in states with deposit insurance or states where a relatively large share of banks belonged to chain banking organizations.     

Testing the forward rate unbiasedness hypothesis during the 1920s

This paper reexamines the forward rate unbiasedness hypothesis (FRUH) during the 1920s and it contributes to the literature as follows: first, it utilizes a database that includes currencies not studied before, as well as the 3 month forward rates; second, it applies three different approaches to test for cointegration and it shows that the choice of the technique is not of crucial importance; third, it tests for the temporal stability of the cointegration results; finally, it tests for the existence of the FRUH in the short run, by means of error correction models, whereas previous studies focused on cointegrated vectors only. Our analysis shows that for countries that did not undergo major financial turmoil during that period, there exists more favorable evidence for the FRUH.     

'The apotheosis of holding company accounting': Unilever's financial reporting innovations from the 1920s to the 1940s

The annual reports of Unilever were widely hailed in the 1940s as outstanding examples of holding company accounting. The accounts did indeed contain many new and innovative features, including segment reporting of sales turnover. This contrasts with the frequently negative assessments of the company's reporting before World War II, and the fact that the company was on record as a relatively late adopter of consolidated statements. In this paper, Unilever's reporting practices from the 1920s to the 1940s are analysed. We argue that the reporting changes of the 1940s had clear antecedents in the 1920s and 1930s, when they emerged in conjunction with the transformation of Unilever from a family-dominated enterprise into a professionally managed organisation. We also argue that, in order to evaluate properly Unilever's pre-war reporting practices, one needs to take into consideration the nature of Unilever as a complex federation of companies, rather than a unitary organisation, and to examine the chairman's address at the annual general meetings. The speeches by Francis D'Arcy Cooper, in particular, contained important disclosures not found in the annual reports. By the early 1940s, Unilever's commitment to improve its financial reporting was sufficiently developed for its officials, in particular Geoffrey Heyworth and P.M. Rees, to play important roles in the drafting of the English Institute's Recommendations on Accounting Principles and in the deliberations of the Company Law Amendment Committee whose report led to the Companies Act 1947. We therefore conclude that Unilever should be ranked with such companies as Dunlop Rubber among the key actors in the modernisation of British financial reporting during the 1930s and 1940s.     

审计经验研究综述

有关审计师的经验、知识、技能、能力以及素质的文献对上述概念之间的差异鲜有定义和区分,使用上存在着误用、滥用等问题.本文对上述概念进行了探讨和辨析,并对有关审计经验的国内外实验研究文献进行了综述,以便于该问题的后续研究.     

The development of accounting machines in French banks from the 1920s to the 1960s

French banks faced severe organisational problems in the 1910s and 1920s when the scale of their operations grew dramatically as a result of the broadening of the customer base among personal investors and of the boom in discount activities, both of which required increased levels of bookkeeping. In the meanwhile, due to inflation and trade-union pressure, wages had increased. This led to French banks adopting a strategy of sharing information with German banks, which already seem to have developed the process of mechanising bookkeeping operations. Knowledge exchanges were set up with German (and Belgian) bankers so as to accelerate the transfer of organisation (re-engineering) skills and data-processing. Banks in the Alsace region were pioneers in this movement; but several big banks did not wait long before introducing a policy of investing in machines and new platforms for tackling dataprocessing. The 1920s and the 1930s thus represent a key stage in the transformation of French banks into actual service 'organisations'.     

A sequential purchasing power parity test for panels of large cross-sections and implications for investors

In this paper we use monthly time series data for not less than 64 countries and a new sequential approach to test for purchasing power parity (PPP). The results are strong in that the evidence in favor of PPP is very weak. In fact, for the US-dollar-based exchange rates the evidence is basically non-existent. In order to eliminate the effect of the base currency, we also apply the sequential PPP test to all pairs of exchange rates, and find similarly weak evidence of PPP. However, for those rates where evidence is found, using a technical trading rule, we find evidence of significant profits. The predictability of the stationary pairs is therefore important for investors.     

Conjectures on the influence of the 1920s Betriebswirtschaftslehre on Sweeney's Stabilized Accounting

The antecedents of Sweeney's Stabilized Accounting are early examples of responses to economic and political pressures. Sweeney's 1927 and 1928 works promulgating Goldmark Balance Sheets (Goldmarkbilanz) appeared, however, when the unique events (viz. hyperinflation and potential collapse of the Reich), which were the catalysts for backwards rescaling procedures of Goldmarkbilanz, had disappeared. Sweeney's writings pre and post 1928 differ markedly. Vacillations between indexation (backwards then forwards), historical cost, then replacement cost based stabilisation methods, which pepper his work, mirror the changing fortunes of Schmalenbach's, Mahlberg's and Schmidt's proposals. Sweeney's legacy is twofold: (i) the popularisation of indexed accounting, particularly in Anglo-American countries, and (ii) recognition of the need to couple a homogeneous (stable) unit of measure with a function of accounting which was to provide a measure of an entity's command over goods and services and any changes therein.     

On the Theory of Rational Insurance Purchasing: A Note

The authors consider the optimal amount of insurance purchased by an individual who behaves according to the Hurwicz criterion of choice under uncertainty. Their results are compared with earlier results obtained in alternative frameworks (expected utility maximization and Savage's regret criterion). It is shown that a positive amount deductible is often suboptimal.     

Measuring the persistence of deviations from purchasing power parity with a fractionally integrated STAR model

Empirically, elements of both fractional long memory and threshold non-linearity are present in the real exchange rates of the G-7 countries against the US, notably in the EU countries. Estimated half lives of deviations from PPP using median unbiased corrections to conventional linear autoregressive models corroborate existing evidence related to the PPP paradox as half lives range from at least four years to an infinite number of years. In contrast, for each EU country, accounting for threshold non-linearity results in estimated half lives that can be less than three years even with the allowance for fractional long memory.     

Why panel tests of purchasing power parity should allow for heterogeneous mean reversion

Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of mean reversion across real exchange rates. In contrast to several other severe restrictions of panel models and tests of PPP, the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. This paper analyzes the properties of homogeneous and heterogeneous panel unit root testing methodologies. Using Monte Carlo simulation, we uncover important adverse properties of the panel approach that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. These properties can lead to misleading inferences on the validity of PPP. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates.