Testing Purchasing Power Parity Research Articles

Research and Enlightenment of Purchasing Power Parity Test

Purchasing Power Parity (PPP) is the cornerstone of many theoretical models in international finance. The PPP test is of great importance to market participants, central banks and policy makers. This paper reviews the relevant literature on the validity test of PPP in recent years: involving micro and macro directions, which are embodied in four aspects: empirical, model, exchange rate and evaluation. Although the research and application of PPP test have made great progress, there are still some problems and challenges. With the continuous development of the global economy and the improvement of data availability, the future research on PPP test will be more in-depth and comprehensive.

Testing Purchasing Power Parity (PPP) to examine Economic Openness of Australian Economy

Testing Purchasing Power Parity (PPP) to examine Economic Openness of Australian Economy

Fourier Nonlinear Quantile Unit Root Test of Purchasing Power Parity in cryptocurrencies

ABSTRACT The primary purpose of this article is to conduct the Fourier Nonlinear Unit Root Test to check Purchasing Power Parity (PPP) for seven cryptocurrencies traded in seventeen countries from 2010 to 2021. The unit root test supports the PPP hypothesis when we use each cryptocurrency separately for all the countries. However, the PPP hypothesis is strongly supported when we pool them together by countries and cryptocurrencies. This finding is in line with the power of the test issue of the PPP for regular PPP testing, which also holds good in cryptocurrencies.

Purchasing power parity in GIIPS countries: evidence from unit root tests with breaks and non-linearity

PurposeThis paper aims to test purchasing power parity (PPP) hypothesis for Greece, Italy, Ireland, Portugal and Spain, which are known as the GIIPS countries.Design/methodology/approachThe authors conduct a comprehensive analysis by using unit root approaches without and with structural breaks and non-linearity.FindingsThe PPP is valid for the GIIPS countries. Considering structural breaks in non-linear framework plays a crucial role.Originality/valueThere is no empirical study testing PPP hypothesis by focusing on the GIIPS countries. This study further takes into account for structural breaks and non-linearity in the real exchange rates of these countries.

Testing Purchasing Power Parity in Cambodia: Time-Varying Trade Weights in Constructing Real Effective Exchange Rate

The purchasing power parity (PPP) is generally accepted as the exchange rate projection between two countries relative to their inflation rate. However, despites many researches in the past years, the answer to whether the PPP holds, remains an on-going debate. The prior researches are criticized for their heavy reliance on the bilateral exchange rate which consists of short time-series or uses multilateral or real effective exchange rate (REER) constructed by the fixed trade weight. Finally, the implementing of only the most popular unit-root or stationary tests such as ADF and PP deems to diagnose with certain weaknesses, for instance, size distortion ascending from the heteroscedasticity. The main purpose of this study, therefore, is to study whether the PPP holds in Cambodia? In this paper, an alternative stationary test known as the KPSS test is incorporated with the stationary test thereof. Avoiding the aforementioned problem, the time-varying trade weights of Cambodia from 1995 to 2019 is employed to construct the total data points or months of 295 REER from January 1995 to July 2019 instead. The result indicates that the PPP theory holds in Cambodia based on the result generated by the ADF test modeled with constant and trend. The test result thereof also indicates that the REER of Cambodia has a mean reverting process.Keywords: Purchasing Power Parity, Real Effective Exchange Rate, Time-Varying Trade Weights, Unit Root TestJEL Classifications: F31, F41, C23DOI: https://doi.org/10.32479/ijefi.10543

Testing Purchasing Power Parity (PPP) to Examine Economic Openness of Turkey Economy: 1958-2018

Testing Purchasing Power Parity (PPP) to Examine Economic Openness of Turkey Economy: 1958-2018

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.

Testing Purchasing Power Parity in Cambodia: Time-Varying Trade Weights in Constructing Real Effective Exchange Rate

ABSTRACT The main aim of this study is to figure out whether the PPP hold or not in Cambodia? This research thoroughly takes into account major controversies which many researchers cogitate to be the cause of PPP breakdown. The aforementioned controversies are the using of the bilateral exchange rate which consists of short time-series or the using of multilateral or real effective exchange rate (REER) constructed by the fixed trade weight, the implementing of only the most popular unit root or stationary tests, such as ADF and PP tests to test for PPP. Thereof, this shortcoming is fulfilled through the implementing of another alternative stationary test known as the KPSS test on the monthly constructed REER from January 1995 to July 2019. The total data points or months of 295 is constructed using time-varying trade weights from 1995 to 2019 of Cambodia. After attempting to deal with the controversies thereto, the empirical result indicates that the PPP theory holds in Cambodia based on the result of the ADF test which is modeled with constant and trend. The test result indicates that the REER of Cambodia has a mean reverting process. Keywords: PPP, REER, Time-Varying Trade Weights, Unit Root Test.

Testing Purchasing Power Parity and Uncovered Interest Rate Parity in a Multivariate Cointegration Analysis for China and India: 1993: Q1 to 2015: Q1

Testing Purchasing Power Parity and Uncovered Interest Rate Parity in a Multivariate Cointegration Analysis for China and India: 1993: Q1 to 2015: Q1

Testing Purchasing Power Parity Hypothesis for Azerbaijan

This article examines the validity of purchasing power parity hypothesis for Azerbaijan. Econometric investigation uses linear and nonlinear unit root tests and are based on the time series characteristics of the real exchange rate of Azerbaijan’s manat versus the national currencies of its major trading partners; USA, European Union, Russia and Turkey. Findings support the validity of the purchasing power parity hypothesis between Azerbaijan and its market economy dominated trading partners, but not support between Azerbaijan and its former centrally controlled partner.

On the Empirical Failure of Purchasing Power Parity Tests

SummaryEmpirical research on the validity of the purchasing power parity (PPP) condition is generally based on real exchange rates built using the consumer price index (CPI), but fails to provide clear support to PPP. In this paper we show theoretically that, even if the law of one price (LOP) holds for traded goods, CPI‐based real exchange rates are not mean reverting, and are neither stationary nor integrated. Therefore, both unit root and stationarity tests should reject their null. Our theoretical results are validated both by simulations and an empirical application. Copyright © 2014 John Wiley & Sons, Ltd.

Testing purchasing power parity hypothesis: a semiparametric varying coefficient approach

Traditional linear cointegration tests of purchasing power parity (hereafter PPP) hypothesis often lead to rejection of the PPP hypothesis. More recent studies allowing for some sort of nonlinearity in econometric modelings (e.g., Michael et al. J Polit Econ 105:862–879, 1997) suggest mixed results and leave this problem as an unresolved issue. In this paper, we analyze PPP hypothesis within a semiparametric framework using the varying coefficient model with integrated variables as considered by Cai et al. (J Econ 148:101–113, 2009) and Xiao (J Econ 152:81–92, 2009). Applying the cointegration test suggested by Xiao (J Econ 152:81–92, 2009), we conduct the cointegration test of PPP hypothesis between US and Canada, US and Japan, and US and UK, respectively. In contrast to the usual findings based on linear model PPP hypothesis testing, our semiparametric model-based tests support the PPP hypothesis.

Testing purchasing power parity for Japan and the US: A structural-break approach

In this work we empirically assess the weak and strong forms of purchasing power parity (PPP) hypothesis for the economies of Japan and US. Monthly data for the, traded-goods price indices and the JPY/USD exchange rate are employed for the, period from January 2000 to October 2012. This period includes large shocks, such as, the US subprime crisis and the 2011 Tsunami in Japan. We take into account possible, structural shifts and breaks by employing the class of Lee and Strazicich (2003, 2004) unit, root tests. Empirical analysis suggests that a break corresponding to the start of the US subprime crisis is not rejected. Furthermore, utilizing the Gregory and Hansen (1996) and, Hatemi (2008) cointegration methodologies, the weak form of PPP is not rejected. We, also test the strong PPP hypothesis by using Dynamic Ordinary Least Squares, (DOLS). The empirical evidence rejects the strong form of PPP for the period, preceding the US subprime crisis in contrast to the period after.

Capital flows, real exchange rate misalignment and PPP tests in emerging market countries

The economic performance of emerging markets has significant impacts on economic growth and volatility of macroeconomic indicators in various countries. Emerging markets accounted for 20–43% of global exports during the period 1970–2005, and held 70% of global foreign reserves in recent years. More than 50% of the exports from the Euro area, Japan and the United States go to emerging markets and other developing countries. The globalization of capital flows is facilitated by technological innovations and excellent information networks, coupled with sharp increases in savings that are directed into financial instruments across borders. The use of Purchasing Power Parity (PPP) as a benchmark in exchange rate policy reforms assumes the existence of a stable relationship between the exchange rate and the ratio of price levels in two countries. This article investigates whether or not long-run PPP holds in emerging markets. Johansen's cointegration technique is used with annual data in analysing the relationship between exchange rates and the CPI during the period 1951–2005. We found overwhelming support for long-run PPP in emerging markets, thus, PPP is a reliable guide for exchange rate determination and exchange rate policy reforms in these countries.

Covariate selection for testing purchasing power parity

This article employs Hansen's (1995) Covariate Augmented Dickey–Fuller (CADF) test to reexamine the issue of Purchasing Power Parity (PPP) using post-Bretton Woods exchange rate data for 20 industrialized countries. Instead of just using a single covariate as in the literature, we implement the test by using Bai and Ng's (2002) method to choose suitable stationary covariates. Our empirical results show that the real exchange rates generally display long-run mean reversion and support PPP, as contrasted with those obtained in Amara and Papell (2006) that less rejections of unit root hypothesis are made with the same test. The panel unit root test suggested by Chang (2004) is also performed to justify our results.

Testing For Purchasing Power Parity In A Panel Of Middle-Eastern Countries

The attention given to testing for purchasing power parity (PPP) using middle-eastern data has so far been very limited. This paper tests for PPP in a panel of twelve countries from the Middle East. Four different unit root procedures are used to test for the mean reversion property in the real exchange rates of these countries. The evidence in support of PPP in the tested panel is generally found to be weak.

Estimation and Inference in Time Series with Omitted I(1) Variables

Standard cointegration analysis yields spurious results when relevant I(1) variables are omitted from the model. As an alternative, an unobserved components approach is proposed where the error term is modelled as the sum of a transitory and a random walk component. The latter should capture omitted I(1) variables and is allowed to be correlated with the observed I(1) variables. Provided that the model is correctly specified and identified, the long-run relation between the non-cointegrated variables can be estimated consistently with maximum likelihood using the Kalman filter. The robustness of this approach to the integration properties of the error terms is supported for small samples via an extensive Monte Carlo study. The proposed methodology is applied to testing purchasing power parity.

Panel Unit Root Tests by Combining Dependent P Values: A Comparative Study

We conduct a systematic comparison of the performance of four commonly used P value combination methods applied to panel unit root tests: the original Fisher test, the modified inverse normal method, Simes test, and the modified truncated product method (TPM). Our simulation results show that under cross‐section dependence the original Fisher test is severely oversized, but the other three tests exhibit good size properties. Simes test is powerful when the total evidence against the joint null hypothesis is concentrated in one or very few of the tests being combined, but the modified inverse normal method and the modified TPM have good performance when evidence against the joint null is spread among more than a small fraction of the panel units. These differences are further illustrated through one empirical example on testing purchasing power parity using a panel of OECD quarterly real exchange rates.

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.

Purchasing Power Parity: Evidence from a New Testing Procedure in the Nonlinear Modified ESTAR Framework

The presence of transaction costs in trading implies a non-linear adjustment process of real exchange rates towards Purchasing Power Parity (PPP). This may make the traditional tests for PPP using a linear framework, which generally tend to refute the PPP hypothesis, unreliable. This study models the dynamics of the adjustment towards PPP using a modified exponential smooth transition autoregressive process which accounts for both a symmetric and asymmetric adjustment mechanism and tests for the validity of PPP using a new test. Using quarterly data from 10 APEC countries, our results suggest that the bilateral US real exchange rates are mean reverting. Our study provides strong evidence supporting the PPP hypothesis and resolves the inconclusiveness from previous empirical results.