Long-run Purchasing Power Parity Hypothesis Research Articles

IDENTIFYING LATENT GROUPED PATTERNS IN COINTEGRATED PANELS

We consider a panel cointegration model with latent group structures that allows for heterogeneous long-run relationships across groups. We extend Su, Shi, and Phillips (2016,Econometrica84(6), 2215–2264) classifier-Lasso (C-Lasso) method to the nonstationary panels and allow for the presence of endogeneity in both the stationary and nonstationary regressors in the model. In addition, we allow the dimension of the stationary regressors to diverge with the sample size. We show that we can identify the individuals’ group membership and estimate the group-specific long-run cointegrated relationships simultaneously. We demonstrate the desirable property of uniform classification consistency and the oracle properties of both the C-Lasso estimators and their post-Lasso versions. The special case of dynamic penalized least squares is also studied. Simulations show superb finite sample performance in both classification and estimation. In an empirical application, we study the potential heterogeneous behavior in testing the validity of long-run purchasing power parity (PPP) hypothesis in the post–Bretton Woods period from 1975–2014 covering 99 countries. We identify two groups in the period 1975–1998 and three groups in the period 1999–2014. The results confirm that at least some countries favor the long-run PPP hypothesis in the post–Bretton Woods period.

Decomposition into Tradables and Nontradables and the Purchasing Power Parity (PPP) Hypothesis of the Real Won-dollar Exchange Rate

The purpose of this paper is to test the purchasing power parity (PPP) hypothesis using the won-dollar real exchange rate and analyze the effect of the decomposition into tradables and non-tradables on the change of the won-dollar real exchange rate. This paper decomposes the CPI-based real exchange rate into two parts according to Engel (1999); one is the relative price of traded goods between the countries, the other is a component that is a weighted difference of the relative price of nontraded-to traded-goods prices in each country. We construct this by comparing the component subsection weights in CPI. The empirical analysis of this paper consists of two parts as follows. First, we conducted a traditional time series analyses of the real exchange rate, tradable and non-tradable parts respectively, thereby testing the PPP hypothesis and other important hypotheses. Secondly, this paper conducted a Mean Squared Error (MSE) analysis to evaluate the relative contribution of tradable and non-tradable parts to the change of real exchange rate. From the time series analysis, it is not guaranteed that the PPP hyThe purpose of this paper is to test the purchasing power parity (PPP) hypothesis using the won-dollar real exchange rate and analyze the effect of the decomposition into tradables and non-tradables on the change of the won-dollar real exchange rate. This paper decomposes the CPI-based real exchange rate into two parts according to Engel (1999); one is the relative price of traded goods between the countries, the other is a component that is a weighted difference of the relative price of nontraded-to traded-goods prices in each country. We construct this by comparing the component subsection weights in CPI. The empirical analysis of this paper consists of two parts as follows. First, we conducted a traditional time series analyses of the real exchange rate, tradable and non-tradable parts respectively, thereby testing the PPP hypothesis and other important hypotheses. Secondly, this paper conducted a Mean Squared Error (MSE) analysis to evaluate the relative contribution of tradable and non-tradable parts to the change of real exchange rate. From the time series analysis, it is not guaranteed that the PPP hypothesis hold in the long run. The Balassa-Samuelson hypothesis is not either, since the sample size is too small to avoid the ‘power problem.’ In addition, the result of the Mean Squared Error analyses show that tradable goods are more important in explaining the won-dollar real exchange rate dynamics than that of the non-tradable goods. All in all, the results of this empirical analysis are in contrast with the explanation that if the long-run PPP hypothesis does not hold, it is mainly caused by the transaction cost and the non-tradable goods.

An empirical test of Purchasing Power Parity in the post-Bretton Woods era: a panel data approach

After the collapse of Bretton-Woods system, it was believed that under flexible exchange rate system nominal exchange rate will adjust instantaneously to reflect movements in prices between two countries. Consequently, Purchasing Power Parity (PPP) will hold continuously. This study examines the validity of long-run PPP hypothesis for two panels of OECD and developing Asian countries. The results of the study suggest that the PPP hypothesis with its strict symmetry and proportionality condition does not hold in the post-Bretton Woods era. However, when the strict PPP conditions are relaxed, we find a cointegrating relationship between nominal exchange rate and prices, which in turn provides support for the weak form of PPP.

The purchasing power parity hypothesis in Turkey: evidence from nonlinear STAR error correction models

This study re-examines the validity of long-run purchasing power parity (PPP) hypothesis for Turkey using nonlinear cointegration technique. The finding of this article provides the evidence that the long run PPP hypothesis is valid by using nonlinear cointegration technique. This finding argues the validity of the long-run PPP hypothesis in bilateral Turkish real exchange rates with the USA, which is also supported by Sarno (2000) and Erlat (2004).

Symmetry, proportionality and the purchasing power parity: Evidence from panel cointegration tests

This paper investigates the long-run Purchasing Power Parity hypothesis in a dynamic panel of twenty OECD countries, using recently developed heterogeneous panel cointegration tests. An important contribution of the paper is that it investigates the symmetry and proportionality conditions in PPP using likelihood-based inference as suggested by Johansen [Johansen S., 1995, Likelihood inference in cointegrated vector auto-regression models, Oxford University Press.], but with likelihood ratio tests extended to a panel context. We find empirical support for the weak form of the long-run PPP relationship, with the assumptions of symmetry and proportionality being strongly rejected.

Do real exchange rates contain a unit root? Evidence from Turkish 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.

Purchasing Power Parity By sectors From Selected European Countries: Cointegration and Structural Breaks

In this paper we study the long-run Purchasing Power Parity (PPP) hypothesis by traded and non-traded sectors using cointegration techniques in the presence of structural breaks, for a set of European countries during the period 1975:1-1995:12. This approach is complementary to many existing approaches to investigate the PPP Hypothesis. We find evidence in favor of long-run PPP hypothesis when commodity prices and used in the presence of structural breaks. This result lends support to the integration process in the European Union. [C22, F30]

Does the Long-Run Ppp Hypothesis Hold for Africa? Evidence From Panel Co-Integration Study

This paper addresses whether parallel market exchange rates in Africa behave in the long run in a manner consistent with the purchasing power parity (PPP) hypothesis. A recent econometric method, the panel co-integration test, enables us to examine the long-run PPP hypothesis by pooling the time-series data of several countries. This approach is particularly useful when analyzing African countries, which often do not have long time series. Using pooled data for 16 African countries, the study concludes that the behavior of parallel market exchange rates in Africa is consistent with the long-run PPP hypothesis.

Does the Long-Run PPP Hypothesis Hold for Africa?: Evidence from Panel Co-Integration Study

This paper addresses whether parallel market exchange rates in Africa behave in the long run in a manner consistent with the purchasing power parity (PPP) hypothesis. A recent econometric method, the panel co-integration test, enables us to examine the long-run PPP hypothesis by pooling the time-series data of several countries. This approach is particularly useful when analyzing African countries, which often do not have long time series. Using pooled data for 16 African countries, the study concludes that the behavior of parallel market exchange rates in Africa is consistent with the long-run PPP hypothesis.

Re-examine the long-run purchasing power parity hypothesis for a high inflation country: the case of Turkey 1980–93

This paper examines the hypothesis of long-run purchasing Power Parity (PPP) using cointegration techniques for Turkey that experiences high inflation and structural changes coupled with high growth rates simultaneously. The results do not support any long-run bilateral exchange rate-price relationship between Turkey and each of the following countries considered to be the major trading partners of Turkey: France, Germany, the UK, and the USA.

Long-run purchasing power parity and long-term memory: evidence from Asian newly industrialized countries

Fractional cointegration in a trivariate model is used to test the long-run purchasing power parity hypothesis in four Asian newly industrialized economies. Critical values for the Geweke-Porter-Hudak tests based on Monte Carlo simulations are provided. Evidence of fractional cointegration arises when a linear trend is included. Subperiod analysis indicates that a shift in the exchange rate regime is likely to affect the results of cointegration tests

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.

Real Exchange Rates, PPP and the Relative Price of Nontraded Goods

The purchasing power parity hypothesis (PPP) states that nominal exchange rates move with differences in relative prices between economies. The theory has received considerable attention in the economic literature since Cassell [6], and is the foundation of many long-run theoretical hypotheses in international finance; yet, its empirical validity remains in question. Many tests of PPP focus on the stationarity of the real exchange rate, the nominal exchange rate adjusted for changes in price levels between economies. If domestic and foreign price levels and the nominal exchange rate are integrated, then cointegration between these variables implies the existence of both a long-run equilibrium relationship and PPP. The residual, the real exchange rate, then follows a stationary process. The paper uses the multivariate cointegration methodology of Johansen [16] and Johansen and Juselius [17; 18] to examine the source of real exchange rate nonstationarity. Is the nonstationarity due to shifts in the domestic and foreign price of nontradeables or productivity differentials between traded and nontraded sectors? Or is the nonstationarity a possible outcome of difficulties in intercountry comparisons of prices movements associated with construction of these price indices? Most research finds the real exchange rate follows a nonstationary process due to the presence of a unit root [8; 12; 1; 9; 19; 27]. However, the existence of a variable trend in the real exchange rate does not imply the absence of a long-run relationship between relative prices levels and nominal exchange rates for two reasons. First, a long-run relationship between price levels and nominal exchange rates may exist but not the one-for-one relationship implicit in the calculation of real exchange rates due to measurement differences in the construction of price indices between economies. Second, PPP violations may occur due to the presence of permanent productivity innovations which affect the relative price of nontradeables. If these shocks are not represented by measurable variables, a cointegrating relationship will not exist. The paper constructs traded and nontraded GDP price indices and productivity rates for 14 OECD economies, and tests: (1) if the variable trend (the nonstationary process) in the real exchange rate is due to permanent innovations in relative price of domestic and foreign nontradeables; (2) if long-run PPP violations are due to permanent movements in the relative price of nontradeables; (3) if the nonstationarity in the real exchange rate is due to permanent innovations in domestic and foreign productivity differentials between the traded and nontraded sectors; (4) if the variable trend in the relative price of nontradeables is due to permanent innovations in productivity between sectors. Lastly, the paper constructs a cointegrating error correction model

Long-run purchasing power parity: the case of Greece 1980-1992

In this paper we use cointegration techniques to test the long-run Purchasing Power Parity (PPP) hypothesis for nine Drachma exchange rates within the European currency area. The results support the long-run PPP hypothesis only in the cases of Portugal, Spain and the UK, as these countries were not seriously constrained by the Exchange Rate Mechanism (ERM).

Long-run purchasing power parity during the recent float

This paper examines the relevance of long-run purchasing power parity (PPP), which allows for measurement errors, during the recent floating exchange rate period. Previous empirical studies generally fail to find support for long-run PPP over this period. In this paper. In this paper the cointegration property of exchange rates and prices is examined using maximum likelihood procedure, and we find significant evidence favorable to long-run PPP. Further tests for symmetry and proportionality indicate that these two conditions are not generally with the data. The results support the hypothesis of long-run PPP with measurement errors in prices.