Purchasing Power Parity Doctrine Research Articles

International Evidence on Purchasing Power Parity: A Study of High and Low Inflation Countries

The purpose of this article is to select a sample of low inflation countries and high inflation countries and examine the long run validity of the relative Purchasing Power Parity doctrine. We explore the notion that countries with historically low inflation experience strong and stable currency and those with a continuous high inflation face weak and depreciating currencies. After a review of the literature, a theoretical model is developed for the relationship between inflation and exchange rate changes. This is followed by some graphical annual time series and empirical results for selected countries. We find our hypothesis is supported for high inflation countries. We then explore productivity differences and their impact on real exchange rates.

Exchange rate pass‐through to restaurant and hotel prices in the United States: The role of energy prices and tourism development

This study incorporates energy prices and tourism development into the standard purchasing power parity doctrine to investigate exchange rate pass‐through to restaurant and hotel prices in the United States over the period 2001:Q4 to 2017:Q4. We apply the multiple structural breaks cointegration test and flexible autoregressive distributed lag (ARDL) method. Our empirical results provide evidence that exchange rate appreciation reduces restaurant and hotel prices while an increase in energy prices and tourism development causes the prices of restaurant and hotel to rise. However, the pass‐through of exchange rate, energy prices, and tourism development is incomplete in both the long‐ and short‐run with the long‐run pass‐through having a stronger effect. Furthermore, the causality results show that restaurant and hotel prices have predictive power for exchange rate. Causality between restaurant and hotel prices and tourism development has a feedback effect. We also find that exchange rate Granger causes not only energy prices but tourism development while tourism development causes energy prices. The policy implications for these results are carefully outlined in the study.

Real Exchange Rate Fundamentals: A Synthesis of the Literature

A general review of approaches to equilibrium real exchange rate was undertaken. The review covered most of the theoretical, methodological and empirical literatures that had been developed in the attempt to overcoming the measurement problems associated with the concept. The distinct approaches reviewed in the paper included, exchange rate equations with nominal and real disturbances, the purchasing power parity doctrine, productivity approach, macroeconomic balance, varieties of exchange rate equation models, and, behavioral equilibrium exchange rate approach. Although the models were generally theory-based and reasonably well motivated, a comprehensive evaluation of the appropriateness of some of the theoretically identified fundamentals might be a most desired status credibility check.

Model Dinamik Paritas Suku Bunga Indonesia Menggunakan Error Correction Model

The purchasing power parity doctrine in determining exchange rate changes focuses on price factor changes (Jiang, Li, Chang, & Su, 2013)This study examines how currency and interest rates interact with each other to achieve a balance position in the foreign exchange market.Through this approach the exchange rate is determined by the balance of demand and supply between two currencies. This approach also explains how the influence of economic variables such as money supply, national income, price level, and interest rate on the formation of currency rates. Data using the first quarter of 2000 through the fourth quarter of 2013, With econometric analysis through cointegration approach and Error Correction Model will be tested the validity of interest rate parity condition in Indonesi.Estimation of the error correction model variable (V), indicating that the variable passed the t test at 5% confidence level. It indicates that the models specification is acceptable and there is cointegration between the observed variables.

International Trade Theory and the Exchange Rate: A Microeconomic Approach

This is an essay to show the rigorous connection between the neoclassical theory of trade, i.e. the Heckscher-Ohlin model in the context of General Equilibrium conditions, and the real exchange rate as determined by local and foreign prices in a common currency, i.e. the Purchasing Power Parity doctrine. The approach is strictly microeconomic. The purpose of the essay is to analyze the mechanism through which the exchange rate devaluation works for correcting the foreign trade deficit; but considering that, in the real world, this mechanism is not isolated from the influence of other macroeconomic and monetary variables. Some of the most important critiques are presented.

Foreign exchange markets and the purchasing power parity theory

PurposeThe purpose of this paper is to examine the validity of the purchasing power parity (PPP) hypothesis for two Southern African countries, namely: Lesotho and Zambia.Design/methodology/approachThe authors utilized four econometric tests to examine the existence of the PPP hypothesis in Lesotho and Zambia. These tests include two unit root tests without structural breaks – the Dickey-Fuller generalized least squares (DF-GLS) test and the Ng-Perron test; and two unit root tests with structural breaks – the Perron test and the Zivot-Andrews test. The authors’ empirical analysis is based on an annual data set with varying time periods. The sample period spanned 1960-2010 and 1955-2010, for Lesotho and Zambia, respectively.FindingsThe authors found that the PPP hypothesis was supported in the case of Lesotho, but rejected in the case of Zambia.Originality/valueThis paper is the first to simultaneously explore the exchange rate policies, trends, and the PPP for these two countries. The implication of this finding is that Lesotho is unlikely to profit immensely from trade and investment arbitrages; whereas Zambia is more likely to profit immensely from trade and investment arbitrage by trading with the USA. Moreover, the authors’ findings indicate that the PPP doctrine may be a useful guide for the exchange rate and other macroeconomic adjustment policies in Lesotho but not in Zambia.

Validity test of purchasing power parity doctrine: An Indonesian case study

The goal of this study is to analyze the doctrine purchasing power parity (PPP) in Indonesia with the case study of the rupiah exchange rate to U.S. dollar. The autoregressive is used to estimate the relationship between the change of exchange rate and the difference Indonesia–USA inflation rate. The data used in this study are quarterly data obtained from the International Financial Statistics (IFS) and Bank Indonesia (BI) with the period 1997Q4-2013Q4. The exchange rate that used in this study is using the rate on rupiah to U S dollar. The price data used consumer price index in Indonesia and the United States with a base year of 2000. The results of this study show, that rupiah to the U.S. dollar is undervalued during the free floating exchange rate system and, the PPP doctrine to the case of the rupiah to the U.S. dollar is not valid in the period of this study.

Gustav Cassel's purchasing power parity doctrine in the context of his views on international economic policy coordination

Gustav Cassel (1866–1945) has formulated a number of original ideas concerning international economics and finance. These include what possibly was one of the earliest theoretical visions of the goals and scope of international economic policy coordination. However, these ideas largely remained unnoticed or were forgotten after his death. To a large extent, it is due to the fact that Cassel's comprehensive theoretical framework was subject to later fragmentation, while one of the key elements of his argumentation – the purchasing power parity (PPP) doctrine – was taken out of the context and subsequently misinterpreted. The paper aims to reconstruct Cassel's vision of the goals and tools of the international economic policy coordination and to present PPP doctrine in the original theoretical framework.

Panel unit root tests of purchasing power parity for Central Asian countries

Is the real price of commodities among the Central Asian countries similar? Prior research suggests that for Central Asian countries the Purchasing Power Parity (PPP) doctrine does not hold. This article employs alternative cross-section correlations of panel unit root tests to examine the validity of the PPP hypothesis for three Central Asian countries vis-à-vis the Russian Federation. The empirical results show significant support for the PPP doctrine in these Central Asian countries when the testing takes into account the cross-sectional dependence on panel unit root tests.

Purchasing Power Parity Exchange Rate, Misalignment and Export Growth ln Nigeria

This paper analyzes the effct of real exchange rate misalignment on the growth of non-oil export in Nigeria over the period 1960-2002. The paper employs an equilibrium model of the export market and a co-integration technique for the analysis. Real exchange rate misalignment is derived on the basis of the purchasing power parity doctrine. The preliminary data analysis indicates the existence of a long-run relation between real exports and real foreign income. The final analysis shows that real exchange rate misalignment generates adverse effects on the growth of the country’s non-oil export.

Purchasing Power Parity Exchange Rate, Misalignment and Export Growth in Nigeria

This paper analyzes the effect of real exchange rate misalignment on the growth of non-oil export in Nigeria over the period 1960-2002. The paper employs an equilibrium model of the export market and a co-integration technique for the analysis. Real exchange rate misalignment is derived on the basis of the purchasing power parity doctrine, The preliminary data analysis indicates the existence of a long-run relation between real exports and real foreign income. The final analysis shows that real exchange rate misalignment generates adverse effects on the growth of the country’s non-oil export.

Additional sources of bias in half-life estimation

Recently, an increasing amount of attention is being paid to biases in the measurement of time series dynamics based on calculations of half-life. In particular, this issue amplifies the controversy surrounding the purchasing power parity doctrine. Cross-sectional and temporal aggregations, along with mis-specified models, were previously identified as sources of this bias. We identified several other sources of bias, namely, sampling error, incorrect approximations, and structural breaks in time series. These sources should also receive sufficient attention for a sound measurement of half-life.

Cointegration Tests of Purchasing Power Parity in Africa

Despite two decades of implementing economic reforms, there is still a significant gap between official and black market exchange rates in Africa. African policy makers continue to implement exchange rate policies based largely on the assumption that purchasing power parity (PPP) holds. This paper examines whether there is empirical support for PPP in Africa. We used Johansen’s cointegration technique and error correction modeling on annual data for black market exchange rates and CPI in 30 countries covering 1960–97. We found strong support for the PPP doctrine as a useful guide for exchange rate policy reform in Africa.

Purchasing power parity revisited: null of cointegration approach

This paper undertakes a study of the Purchasing Power Parity doctrine as a long run equilibrium condition among a highly economically integrated set of nations, namely members of the European Monetary System (EMS). Here we examine the bivariate cointegration properties of the intra-EMS spot exchange rate series and their price ratios, using the modern null of cointegration approach. Our results support the parity hypothesis within the union.

Purchasing power parity doctrine: weak and strong form tests

The purchasing power parity hypothesis is investigated within a highly economically integrated set of nations, namely the European Monetary System (EMS). The modern Phillips-Hansen Fully Modified Ordinary Least Squares (FM-OLS) procedure is used, which for the first time allows for an unrestricted cointegration test of the PPP doctrine. It corrects for both endogeneity in the data and asymptotic bias in the coefficient estimates. The entire floating exchange rate period is studied. The weak form (necessary condition) and strong form (necessary and sufficient condition) of PPP are sequentially tested for. The Phillips-Ouliaris non-stationarity test on the exchange rate-price ratio series residuals and the FM-WALD test for the required parameter values are conducted. Across the board evidence is found supporting co-integration between exchange rate and prices, i.e. the necessary condition (weak form PPP) is satisfied, with the sole exception of the Belgian Franc. But the necessary and sufficient condition (strong form PPP) is not supported for any of the currencies.

An Empirical Analysis of a Scandinavian Exchange Rate Model

The Scandinavian inflation model (SIM) is augmented by a monetary sector in order to allow for the application of the SIM to floating currency regimes. The structural equations of the resulting generalized SIM are estimated using Swiss data. Two major results are obtained: (1) Systematic lags must be incorporated into the real sector equations of the orthodox SIM, even if estimations are performed on annual data. (2) Exchange rate expectations apparently render the empirical model unstable. The latter result may explain why Swiss monetary authorities felt compelled to terminate the free float of the Swiss franc in late 1978. I. Introduction Ever since currency prices were granted flexibility in early 1973, economists have been struggling hard to find a theoretically consistent and empirically workable explanation for what goes on in the foreign exchange markets. Few will deny that the subsequent erratic behavior of major currencies caught the majority of the profession by surprise. In general, goods arbitrage apparently takes considerably more time than is assumed in the bulk of theoretical studies. Also, and probably more importantly, exchange rate expectations seem to include an extrapolative component which is so strong that it allows for periods of sustained currency over- and undervaluation, thus putting considerable pressure on the exporting or import-competing sector of the domestic economy. It appears that early proponents of flexible exchange rates had scarcely anticipated problems such as these, which seem to indicate that the world is not always as frictionless and expections not quite as rational as mainstream economic reasoning postulates. In an attempt to cope with the challenge posed by unexpectedly volatile exchange rates, the profession soon set out to construct analytically tractable models which go beyond good old purchasingpower-parity doctrine, and attempt to model short-run disequilibrium exchange

Appraising Currency Strengths and Weaknesses: An Operational Model for Calculating Parity Exchange Rates

This paper presents a model for appraising currencies that is based on an operational variant of purchasing power parity doctrine. The behavior of currencies under different exchange regimes—floating rates, strictly managed rates, crawling peg rates, and fixed exchange rates—is analyzed in detail. The results support this doctrine, provided the parity exchange rate is derived from an interrelationship of differentials in inflation rates and changes in exchange rates of trading partners, both appropriately weighted by trade shares. A discussion of forecasting implications concludes the paper.

Nontraded Goods and the Heckscher-Ohlin Model

ECONOMISTS HAVE LONG RECOGNIZED that nontraded goods play an essential role in the analysis of many problems of international economics, such as devaluation, the purchasing power parity doctrine, and certain questions in international monetary theory. Yet only recently2 have nontraded goods begun to be integrated into those models used in the analysis of the pure theory. Perhaps the best known of these is the Heckscher-Ohlin or factor endowments approach. As refined by Samuelson and others this model of the production structure of a trading economy yields four basic results: the factor price equalization theorem, the Rybczynski effect concerning the impact of endowment changes on outputs at constant commodity prices, the Stolper-Samuelson effect concerning the impact of commodity price changes on factor rewards with endowments fixed, and the proposition that with fixed endowments a change in the terms of trade will cause an increase in the output of that good whose relative price has risen and a decline in the output of the other. These results all depend upon the production structure independently of demand and upon the assumption that exactly two goods are being produced. Both of these descriptions are violated in the case of a nontraded good, as the addition of the nontraded commodity ipso facto implies an increase in the number of goods, and as determination of the pattern of production now requires that demand conditions for the nontraded good be considered explicitly. In this paper I attempt to comprehensively analyze these four basic properties in the presence of nontraded goods. I shall consider the usual two-commodity, two-factor Heckscher Ohlin model with the addition of a nontraded third good and a domestric demand function for its output. Most of the results can be extended, and I shall indicate in footnotes how they are affected when there are an arbitrary number of nontraded goods and/or of factors and traded goods. The extension to cases involving arbitrary but unequal numbers of factors and traded goods will, however, be largely ignored.