Support For Purchasing Power Parity Research Articles

Nonlinear adjustment to purchasing power parity in China

This study applies a simple and powerful nonlinear unit root test proposed by Sollis (2009) to investigate the Purchasing Power Parity (PPP) for China's real exchange rate vis-à-vis her nine trading partner countries over the period January 1986 to October 2009. The empirical results indicate that China's real exchange is a nonlinear process and a unit root in real exchange rate was not found for most of the cases under study. These results provide strong support for PPP for China relative to her major trading partner countries.

Purchasing power parity with nonlinear and asymmetric smooth adjustment

This empirical note applies a simple and powerful nonlinear unit root proposed by Sollis (2009) to test the validity of long-run Purchasing Power Parity (PPP) for Japan's Real Exchange Rate (RER) vis-à-vis its eight trading partner countries. The empirical results indicate that PPP holds for Japan relative to her major trading partners, with the exception of Hong Kong and Thailand, and the adjustment towards PPP is nonlinear and in an asymmetric way. This result provides support for PPP for Japan relative to its major trading partner countries.

Nonlinear adjustment to purchasing power parity for Germany's real exchange rate relative to its major trading partners

This study applies a simple and powerful nonlinear unit-root test proposed by Sollis (2009) to test the validity of long-run Purchasing Power Parity (PPP) for Germany's real exchange rate vis-à-vis its trading partner countries. The empirical results indicate that PPP holds for Germany relative to its major trading partners, with the exception of Canada, and the adjustment towards PPP is nonlinear and asymmetric. This result provides support for PPP for Germany relative to its major trading partner countries.

Towards solving the PPP puzzle: evidence from 113 countries

Several different approaches have been followed by researchers to test the validity of Purchasing Power Parity (PPP). Since the introduction of the unit-root tests, researchers have applied a battery of these tests to determine whether the real exchange rates are stationary. If the answer is in the affirmative, PPP is validated. While application of the standard augmented Dickey–Fuller test has not provided much support for PPP, a test that incorporates nonlinearity in the rates has. Under both tests, however, the null of nonstationary is tested against the alternative of stationarity. In this article, when we switch the null with the alternative and apply Kwiatkowski et al. (1992) test, we provide relatively more support for the theory, getting closer and closer towards solving the PPP puzzle.

Evidence on PPP from a cointegration test with multiple structural breaks

Despite a plethora of studies on purchasing power parity (PPP), those that take a cointegration approach have found mixed evidence on PPP. The goal of this article is to obviate existing tensions in the PPP literature by using a simple test for cointegration between nominal exchange rate and relative prices that accounts for multiple structural breaks. We find that for 14 out of 15 OECD countries, there is evidence of a cointegration relationship between nominal exchange rate and relative prices at the 5% level. Only for Japan, we find evidence for cointegration at the 2.5% level. These results suggest overwhelming evidence of support for PPP for the OECD countries.

Parity Reversion in Real Exchange Rates: Fast, Slow or Not At All?

This paper tests for purchasing power parity (PPP) using real effective exchange rate data for 90 developed and developing countries in the post-Bretton Woods period. Support for PPP is found, since the majority of countries experience finite deviations of real exchange rates from parity. The speed of parity reversion is found to be typically much faster for developed countries than for developing countries and to be considerably faster for countries with flexible nominal exchange rate regimes compared with countries having fixed nominal exchange rate regimes. [JEL C22, F31, F41]

Parity Reversion in Real Exchange Rates: Fast, Slow, or Not at All?

This paper tests for purchasing power parity (PPP) using real effective exchange rate data for 90 developed and developing countries in the post-Bretton Woods period. Support for PPP is found, since the majority of countries experience finite deviations of real exchange rates from parity. The speed of parity reversion is found to be typically much faster for developed countries than for developing countries and to be considerably faster for countries with flexible nominal exchange rate regimes compared with countries having fixed nominal exchange rate regimes. Copyright 2006, International Monetary Fund

The trend behavior of real exchange rates: Evidence from OECD countries

The Trend Behavior of Real Exchange Rates: Evidence from OECD Countries. — This paper examines the validity of purchasing power parity (PPP) under the current float using real effective exchange rates of eleven OECD countries. The author employs a test which allows for a one-time change in the intercept and/or in the slope of the trend function. The timing of the structural break is treated as unknown and is endogenously searched from the data. It is found that for a vast majority of countries, the real exchange rate can be characterized as a stationary process with a broken trend. The paper provides support for PPP in the long run.