Relative Purchasing Power Parity Research Articles

An Assessment of Purchasing Power Parity in the Long-Run: Evidence from India and its four Major Trading Partners

The present study focuses on evaluating the validity of the Relative Purchasing Power Parity (RPPP) theory for India and its four major trading partner nations namely the United States, China, the United Arab Emirates, and Saudi Arabia using monthly time series spanning January 2001 to March 2021. For the purpose of empirical analysis, standard Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root tests, as well as the Johansen-Juselius cointegration technique, have been applied. Firstly, the stationarity of the real exchange rate has been investigated using standard unit root tests. The findings indicate that each country’s real exchange rate is nonstationary signifying the absence of strong PPP. Thereafter, the weak form of PPP was tested in the second stage using the Johansen cointegration test. The findings of the cointegration test confirm the presence of a long-run relationship among bilateral exchange rates, domestic price levels, and foreign price levels for all countries undertaken except for the UAE. Since three economies from among the total four trading partners’ country-pair support the existence of PPP, it can be said that PPP holds for the Indian rupee exchange rate for the economies so considered. The study further signals that India’s trade with the UAE could lead to arbitrage opportunities.

Tests of goods market integration between China and African BRI countries

AbstractThe Chinese Government has promulgated the “Belt and Road Initiative” (BRI) to increase trade flows and integrate goods markets between China and BRI countries. The validity of purchasing power parity (PPP) implies well‐integrated goods markets, a precondition for further economic convergence, and the next stage of economic integration in factor, service, and financial markets. Our study aims to examine the validity of the PPP and the extent of goods market integration between China and selected BRI countries in Africa. Since the functional form of the cointegrating relationship may not be exact or linear, we adopt the nonparametric rank tests for analysis without prior knowledge and specification of the functional form. We also address the rank problems that occur in multivariate rank tests. Our empirical results provide strong evidence of an unrestricted PPP relationship with reasonably strong evidence of nonlinearity in the data. We also find that some African BRI countries have experienced goods market integration with China during the second‐half period only. This indicates that the introduction of the BRI in 2013 and China's active involvement in African economic development through BRI projects are leading to enhanced goods market integration between China and Africa. The results indicate favorable prospects of closer economic cooperation in the factor, service, and financial markets to build a free trade area or common markets with BRI countries in Africa.

Depth-weighted means of noisy data: An application to estimating the average effect in heterogeneous panels

We study the depth-weighted L-type location estimator of multivariate data when the observations are measured with noise. Under a drifting asymptotic framework, we show that the depth-weighted mean estimators with noisy data are still consistent and asymptotically mean-zero Gaussian under mild conditions. We apply the results to longitudinal data models of heterogeneous agents and develop the depth-weighted mean-group estimator of a vector of random coefficients, which estimates the multivariate average effect in heterogeneous panels or among heterogeneous treatment effects. As an empirical illustration, we examine the relative purchasing power parity.

Expected Trends of Shoulder Arthroplasty Infection and Its Economic Burden in the United States

Introduction: Periprosthetic joint infections (PJI) are a major cause of morbidity after shoulder arthroplasty. However, there is a paucity of the case trends and national economic impact they pose. In this study, we aimed to investigate the economic stress that shoulder PJIs place on the American healthcare system and the toll they will incur over the coming decade. Methods: The Nationwide Inpatient Sample (NIS) database was used to study trends in shoulder PJI cases and total hospital charges for anatomic total shoulder arthroplasty, reverse shoulder arthroplasty, and hemiarthroplasty from 2011 to 2018. A linear regression analysis was used to predict cases and total hospital charges through the year 2030. US dollar values were adjusted to 2021 relative purchasing power parity. Results: From 2011 to 2018, shoulder PJI procedure volumes increased by 226%. The rise PJI cases was demonstrated to outpace non-infected arthroplasties, rising from 0.8% in 2011 to 1.4% infection rate in 2018 The rise in cases translated to an increase in total charges, from $44.8 million in 2011 to $190.3 million in 2018. Linear regression modelling projects cases to rise by an additional 176% and annual charges to more than double to $459.6 million by 2030. Conclusion: This study demonstrates the large economic burden that shoulder PJIs pose on the American healthcare system, which is predicted to reach nearly half of a billion dollars in annual charges by 2030. Understanding trends in procedure volume and hospital charges will be critical in evaluating strategies to reduce shoulder PJIs.

Does Purchasing Power Parity Hold Between Asian Economies Before and After the Financial Crisis? Evidence from the Time-Series Model

In exchange rate determination models, the purchasing power parity (PPP) acts as a fundamental theory, which provides the basis for exchange rate determination across countries respectively. The main objective of this study is to investigate if there exists long-run purchasing power parity in the long run between the Asian economies and developed economies. This will help to understand the long-run exchange rate determination in these countries and helps to make effective monetary policies. This study tests the long-run PPP relationships between Asian economies (China, Japan, Singapore) with the UK and the US respectively. It is important to observe whether PPP holds between Asian economies and the economies of the UK and US by using time-series analysis respectively. Johansen Cointegration test is used to examine the relative PPP among these countries on full sample and sub-samples before and after the global financial crisis respectively. In full sample and subsamples, the Cointegration results show that PPP holds Asian economies (China, Japan, and Singapore) with the UK and the US respectively. This study finds significant evidence to accept that PPP holds which implies that the domestic prices of Asian economies are influenced by the US and UK prices and it explains a significant amount of variation in their domestic prices and inflation.

Globalization, long memory, and real interest rate convergence: a historical perspective.

This paper investigates whether the real interest rate parity (RIRP) is valid during the three waves of globalizations that occurred in the last 150 years (1870–1914, 1944–1971, 1989 to the present). If any, these periods should favor RIRP, since globalization is a process where economies and financial markets become increasingly integrated into a global economic system. In contrast to the existing literature, we model the departures from RIRP as a long-term memory process and apply fractional integration methods on a sample of real interest rate differentials of seven developed countries: France, Germany, Holland, Italy, Japan, Spain, and the UK across the three globalization waves paired against the USA. We compute impulse response functions (IRF) to gain further insight into the memory characteristics of the RIRP differential processes and provide half-life estimates. We find that deviations from RIRP are mean reverting, providing robust evidence of real interest rate convergence during the three globalization waves. We shed further light on financial and commodity market integration during the three globalization waves by assessing the memory properties of uncovered interest rate parity (UIP) and relative purchasing power parity (PPP) differential processes. We find that deviations from relative PPP and UIP are not always mean-reverting processes. RIRP, relative PPP, and UIP hold simultaneously only in 7 out of 21 cases; RIRP and UIP hold in 11 out of 21 cases; RIRP hold without the support of relative PPP and UIP in 3 out of 21 cases. Thus, the evidence in favor of real interest rate convergence appears to be driven more by UIP than relative PPP. All these results are, to the authors knowledge, new to the literature.

Purchasing Power Parity Approach to Exchange Rate Misalignment in Nigeria

This study examines the purchasing power parity (PPP) approach to the determination of exchange rate misalignment in Nigeria by using two variants of the PPP: the absolute PPP (aPPP) and the relative PPP (rPPP). Data on the Nigerian Naira to US Dollar ( N/$), British Pound ( N/£) and Chinese Yuan (N /¥) interbank exchange rates, Nigeria consumer price index and Inflation as well as the US, UK and China consumer price indices and inflation rates spanning 2008:M1 to 2018:M12 were utilized. A recently modified fractional cointegration framework was employed, taking care of smooth structural breaks and nonlinearity, while the unit root tests employed the fractional alternatives. The results confirmed that the aPPP approach to exchange rate determination is unrealistic but revealed empirical support for the rPPP approach. Furthermore, the exchange rates computed with the rPPP approach show that the interbank Naira to US Dollar, UK Pounds and Chinese Yuan exchange rates were overvalued in most of the period of this study. The period of undervaluation observed in June 2016 and April 2017 coincided with the periods when CBN introduced the investors and exporters window. The study recommends the use of rPPP for gauging the level of exchange rate misalignment in Nigeria and suggests the need to diversify the export base to appreciate the exchange rate.

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.

Does trade openness explain the deviation of purchasing power parity and exchange rate movement?

Real exchange rate movements are important in determining a country’s competitiveness and trade flows. The real exchange rate also plays an important role in postulating a relationship between exchange rates and prices as explained in the theory of purchasing power parity (PPP). In this study, we examine the validity of PPP theory in four groups of economies (developed, developing, high, and low trade openness economies) from 1980 to 2016. Our main objective is to examine if trade openness matters in determining the validity of PPP. The study applied the panel unit-root tests to test for the PPP theory. Besides, a static panel threshold regression is applied to investigate the main determinants of real exchange rate movements besides testing the relative PPP theory. The panel unit-root tests revealed the validity of relative PPP theory in all cases. However, the threshold regression reported that the PPP condition may not hold in all regimes when a nonlinearity relationship exists. Foreign and domestic prices are influential in determining the PPP relationship.

Inflation and Exchange Rates: An International Examination of Relative Purchasing Power Parity

Purchasing power parity (PPP) is an old and controversial proposition in economic literature. It is based on the law of one price, which argues that, after adjusting for the exchange rate, domestic and foreign price levels are equal. The relative version of PPP argues that exchange rate changes depend on the differential between domestic and foreign inflation rates. The absolute PPP version is based on restrictive assumptions that prevent it to hold in the short run. However, several studies support the validity of the relative PPP proposition in the long run. It is often observed that countries with persistently high inflation experience weak currencies. Our empirical testing using impulse response functions derived from a VAR model for eight countries provide mixed results. In six out of eight selected countries, relative PPP is supported by data in the long run.

Has the Euro Shrunk the Band? Relative Purchasing Power Parity Convergence in a Currency Union*

AbstractI study the effects of entry to the European Monetary Union (EMU) on relative purchasing power parity (PPP) convergence using monthly disaggregated price indices from 32 European countries from 1999 to 2016. I examine the entry of Cyprus, Malta, Slovakia, and Slovenia to the EMU, and I estimate the bands of inaction of relative prices before and after entry using a threshold autoregressive model. I find a positive effect of the EMU on relative PPP convergence: after entry, the bands of inaction with EMU members fell by 17 percent. Cross‐sectional evidence supports the theoretical prediction that bands of inaction are related to transaction costs.

The triangular purchasing power parity hypothesis: A comment

AbstractThe recently proposed triangular purchasing power parity (PPP) hypothesis posits that, in a world dominated by the United States, China and Euroland, the exchange rate between the US dollar and the euro will be a function of the Euroland price level relative to China’s price level. Contrary to conventional PPP, the US price level plays no role. We show that the theory underlying triangular PPP is flawed and that it is no more than a simple transformation of the conventional PPP relationship. Moreover, some of the empirical evidence presented in support of the triangular PPP actually refutes one of its central ideas.

Long-run purchasing power parity redux

We test for long-run covariability between nominal exchange rate depreciation and inflation differentials to provide a new perspective on long-run Purchasing Power Parity (PPP). The method directly tests Cassel’s concept of relative PPP and is more robust to departures from exact unit roots in nominal exchange rates or relative prices than standard unit root and cointegration tests for PPP. The central result of the paper is that the 90 percent confidence interval for (1) the long-run correlation coefficient is above zero and (2) the long-run linear regression coefficient contains one and, therefore, long-run PPP cannot be rejected for 9 of the 16 countries. For six of the countries, adding a third criterion that the confidence interval for the long-run linear regression coefficient have relatively narrow bands provides strong evidence of long-run PPP. The evidence of long-run PPP is much stronger for high inflation/high depreciation countries than for low inflation/low depreciation countries.

Wage Level as One of the Most Important Indicators of the Quantitative Aspect of the Standard of Living of the Population and Selected Indicators of Economic Maturity in OECD Member Countries

The present paper focuses on the comparison of wage levels across OECD countries, the research data coming from an official OECD website. The following eight variables are employed in this study – the average wage, minimum wage, GDP per capita, tertiary education attainment, employment ratio, trade unions, labour productivity and inflation rate. The average wage represents the main explained variable in regression and correlation analysis, the remaining seven variables being used as potential explanatory ones. In order to compare living standards in different countries, average and minimum wages as well as per capita GDP data were adjusted to relative purchasing power parity. The principal objective was to identify which explanatory variables statistically significantly affect the average wage. The analysis showed that only three of them – namely the employment ratio, GDP per capita and labour productivity – have a significant effect at a 5% statistical level. The regression hyperplane with a forward stepwise selection was applied. Nine clusters of OECD countries were created based on both all the eight variables and four of them selected in regression analysis (the average wage and three explanatory ones) with the aim to identify the countries that coexist in the same cluster. Ward's method and Euclidean distance are utilized in cluster analysis, the number of clusters being determined with the use of the Dunn index. The study also aims at the prediction of the average wage by 2022, which was made via exponential smoothing of time series. (The greatest purchasing power is reported by Luxembourg, Switzerland, Iceland, the U.S., the Netherlands, Denmark, Norway and Austria, the highest average wage growth rate by 2022 being expected in the Baltic and some other post-communist countries.)

Evidence on PPP with China along the belt and road using the three-regime TAR cointegration tests

The Chinese Government has proposed the ‘Belt and Road Initiative’ (BRI) in order to increase trade flows and economic prosperity among the Belt and Road (BR) member countries. The BRI may call for enlargement of economic cooperation as manifested by forming an economic or monetary union in the long term. It is therefore essential to choose a subset of member countries that fulfils the criteria for joining the potential economic or monetary union. The validity of purchasing power parity (PPP) implies well-integrated goods markets and is a pre-condition for further economic convergence. While the presence of transaction costs causes nonlinearities in the adjustment mechanism, our empirical study applies a three-regime threshold autoregressive (TAR) cointegration method for analysis. Our results support the existence of a PPP relationship with China for 12 sampled Asian member countries. Chinese policymakers can prioritize these BR countries for closer economic cooperation. Also, this TAR cointegration method can estimate the unobservable proportional transaction costs from the thresholds. The results reveal BR countries with large thresholds as targets to curtail transaction costs of trading in order to enhance the efficiency in international goods arbitrage and the degree of trade integration along the BR routes.

동아시아 국가들의 구매력평가 변수가 빅맥지수에 미치는 영향에 관한 연구

Our study is to identify the effectiveness of the Big Mac index of East Asian countries which is the representative index of Law of one price(Loop) by using variables related to the price index and exchange rates. Purchasing power parity(PPP) which is the theoretical background of Loop is that price indices of various countries determine the long-term exchange rate. It is classified into absolute purchasing power parity(APPP) and relative purchasing power parity(RPPP). APPP is described the exchange rate difference between countries’ price indices, but RPPP is described the change in the exchange rate with a change of the countries' prices indices. The theory used for empirically testing is RPPP. In our study, the Big Mac Index which is MacDonald's representative product sold for the same quality and specifications all over the world for more than 30 years is used to evaluate the effectiveness of PPP. Empirical tests by using yearly data from 2000 to 2017 to Korea, Japan, Hong Kong, Singapore, Thailand, Malaysia. Indonesia, and the Philippines were conducted through panel analysis. As a result of the empirical analysis, variables relating to the price index of did not show statistical significance for the Big Mac index, but statistical significance was shown with variables such as the rate of change in the nominal exchange rate and the exchange rate of purchasing power. In order to hold the robustness, OECD countries and the countries using the floating exchange rate system in samples are analyzed. Then, the results are also similar. Unlike previous empirical studies where the difference the change in the level of price indices between countries related long-term the effectiveness of purchasing power, our study used 17-year time series data to analyze the effect of the change in price index on the Big Mac index however long-term effectiveness has not been verified. The deviation of the Big Mac index and purchasing power is also explained by transaction costs, non-comparative barriers, and legal barriers. Our study implies that the Big Mac Index, which is representative of Loop, did not show statistical significance with the changes in the price level of East Asian countries since 2000, but it is related to the exchange rate change of the nominal exchange rate and the purchasing power. Moreover the latter has a positive relationship. Future research will be conducted by comparing PPP between OECD countries in Asia and Europe and the study of the effectiveness of PPP using the Latte Index by Starbucks and the iPhone Index by Apple.

Purchasing Power Parity (PPP) with Structural Break and Mean Reversion in Real Exchange Rate: The Case of Bangladesh Taka and US Dollar

This paper aims at examining the validity of purchasing power parity (PPP) both in absolute and relative terms with reference to the long run behavior of the real exchange rate of Bangladesh Taka relative to USA dollar. In doing so, the paper tests the presence of mean-reversion in the real exchange rate by using the unit root test approach i.e. Augmented Dickey-Fuller,DF-GLS, Zivot-Andrews tests. The paper verifies the long run relationship on co-integration and VAR framework. Using monthly data (01/2007-06/2013) and annual data (1986-2014), the paper finds support for both absolute and relative PPP. While the paper finds the evidence of structural change (Quandt-Andrew test and CUSUM test) only monthly data. VECM has been applied on monthly data, as there exists co-integrating equations for only monthly data (by using Johansen test ). Unit root test indicates that the real exchange rate is I (1), that is real exchange rate of Bangladesh is not stationary.

The ASEAN experience of the purchasing power parity theory

We used panel data analysis to evaluate the relative purchasing power parity (PPP) hypothesis of the ten ASEAN member countries between 1973 and 2015. We incorporated the cross-sectionally augmented panel unit root test as proposed by Pesaran (J Appl Econ 22:265-312, 2007). For panel cointegration analysis, we employed the four error-correction-based Westerlund (Oxf Bull Econ Stat 69:709-748, 2007) panel cointegration tests. The Westerlund (Oxf Bull Econ Stat 69:709-748, 2007) tests are general enough to permit a large degree of heterogeneity, both in the long-run cointegrating relationship and in the short-run dynamics, and dependence within as well as across the cross-sectional units. To check the robustness of the results, we further estimated the cointegration test excluding Indonesia and Brunei. The findings support our initial results. Further, all the results overwhelmingly support the relative PPP hypothesis. Consequently, the monetary authority would be able to implement a self-regulating monetary policy. It would also be able to control the exchange rates.

Income elasticity of overnight stays over seven decades

This article provides new evidence on the stability of the long-run income elasticity of tourism and travel demand by use of the recently developed smooth time-varying cointegration regression model. The estimations control for relative purchasing power parity of the source country and make use of a specific country dataset where domestic and foreign overnight stays are available over a longer period of time (Switzerland, 1934–2015). Results show that the income elasticity of foreign overnight stays peaks at approximately two in the early 1960s, drops to around one in the early 1980s and from then on remains stable until the end of the sample. Domestic income elasticity reaches its highest levels in the 1930s, then steadily falls towards one in the mid-1960s, and therefrom remains stable until 2015. Different phases in the tourism area life cycle might be a major explanatory factor for variation in income elasticities over time.

Order Flows, Differential Risk Premiums, and the UIP Puzzle

We jointly re-specify the relative purchasing power parity (RPPP) and uncovered interest rate parity (UIP) conditions as the (log) ratio of stochastic discount factors by inverting the market price of risk formula. Our empirical model provides new insights, which show that violations to UIP and RPPP both stem from the existence of a risk premium in exchange rates and from observed market return differentials being a noisy statistic of the markets' expected return differentials in our re-specified model. Using an integrated macro-microstructure framework for expected market return differentials improves our model fit and the validity of UIP and RPPP.