Purchasing Power Parity Theory Research Articles

EXAMINING THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM SRI LANKAN CONTEXT IN RECENT PAST

This research study examined validity of Purchasing Power Parity (PPP) by studying the behaviour of nominal exchange rate and relative price levels between Sri Lanka and United States (US). The theory of PPP has been used to estimate the relationship between relative prices and nominal exchange rate between two countries. Exchange rate between USD/LKR has been taken as dependent variable whereas Relative Price Index between US Price Index and Colombo Consumer Price Index has been taken into consideration as independent variable. The study has been undertaken with the objective of estimating statistically whether Sri Lanka exists Purchasing Power Parity from January 2015 to December 2022. Data that has been collected for this study is monthly time series data from January 2015 to December 2022, which was collected from the data library of the Central Bank of Sri Lanka (CBSL) and data library of International Monetary Fund (IMF) have been used for this study. The results have been estimated using statistical techniques. These include mainly Augmented Dickey Fuller Test for Unit Root Testing, Descriptive Statistics, Ordinary Least Squared (OLS) method and Granger Causality Test. E-views statistical software is used to analyse the PPP model. Econometric Techniques are used to analyse the regression model.

Inflation, Interest Rates and the Amount of Money Supply, Their Impact on Fluctuations of Rupiah Exchange Rate to the Us Dollar During the Pandemic of Covid-19

This study aims to determine and analyze the effect of inflation, interest rates and money supply on fluctuations of rupiah exchange rate to the United States dollar during the pandemic of Covid-19. The inflation variable is analyzed using purchasing power parity theory based on differences in inflation of two countries, while the interest rate variable uses the International Fisher Effect Theory. The money supply variable is represented by M2 or the total money in circulation or in banks. The data used is secondary data for the period of January 2020 – December 2022, totaling of 36 months. Multiple linear regression, t test and F test is used to test the effect of dependent variables on independent variables simultaneously and partially, provided by Smart PLS 4.0 Software. The results showed that partially the inflation had a positive and insignificant effect on fluctuations of the rupiah exchange rate to the US dollar, the interest rate had a significant negative effect on fluctuations of the rupiah exchange rate to the US dollar, and the money supply had an insignificant negative effect on fluctuations of the rupiah exchange rate on US dollars. Simultaneously, the variables inflation, interest rates and money supply have a significant effect on fluctuations of the rupiah exchange rate to the US dollar.

Applicability Analysis of Purchasing Power Parity to RMB Exchange Rate

This paper takes purchasing power parity(PPP) theory and RMB exchange rate as the research object. First, it uses policy analysis method, deviation degree method, real exchange rate method, and definition method to study the applicability of purchasing power parity theory in my country. Then, it selects monthly data from January 1994 to December 2022, and uses Johansen cointegration test method to test the multivariate cointegration relationship between the exchange rate of US dollar against RMB and the Sino-US price index. According to the research findings, a cointegration relationship exists among the three variables, but the experimental results are inconsistent with the theory. The final conclusion is that purchasing power parity still can't explain our country's exchange rate changes very well, but the feasibility of PPP in our country has been enhanced.

Purchasing Power Parity and International Fisher Effect Hypothesis Test: Evidence from Vietnam and 12 Major Trading Partners (2000 – 2022)

Amidst the expansion of the global economy and Vietnam's growing integration into the international arena, the country has formed substantial trade relations with a diverse range of nations across the globe. As a result, it is crucial to comprehend and study the dynamics of exchange rates, relying on the well-established theoretical frameworks of the Purchasing Power Parity (PPP) theory and the International Fisher Effect (IFE). Given the longstanding nature of these theories, the main purpose of this study is to assess the validity and applicability of the PPP theory and IFE in explaining the changes in exchange rates between Vietnam and its various trading partners. Employing a multiple linear regression approach, we investigated quarterly historical data comprising interest rates, inflation rates, and exchange rates of 12 trading partners, including the ASEAN-5, China, the U.S., Japan, South Korea, France, Canada, and Germany from Q1 2002 to Q4 2022. The results unequivocally show that neither the PPP theory nor the IFE can adequately explain the variations in the Vietnam Dong's exchange rate with respect to those of its trade partners, underlining the existence of significant theoretical deviations. Given these observations, policymakers and investors are strongly encouraged to adopt a holistic viewpoint, including a variety of indicators, and conducting additional research to make informed decisions that support long-term economic stability and growth.

Pola Konsumsi di Kota Surabaya Sebagai Indikator Peningkatan Kesejahteraan Masyarakat

Prosperity is always the main target of every government. However, methods to measure prosperity are debatable. Several people argue that the poverty standard from United Nations is valid-enough to decide if people have fulfilled their needs. This measurement does not acknowledge that people also have wants and need to fulfill them. I decided to research Surabaya to understand the prosperity issues by using Purchasing Power Parity theory, the ability of people in Surabaya to fulfill their secondary wants by measuring the total marketing of housing and automobiles, and comparing the economic growth indicator of Surabaya.
 

Empirical Analysis on Stability of Real Effective Exchange Rate Based on PPP Theory

Purchasing power parity (PPP) has been one of the most enduring concepts in the global economy. However, its validity has been questioned around for a long time. In this study, annual data on real effective exchange rates for 64 countries or regions from 1994−2022 are used to conduct a unit root test without structural breaks, followed by the same test containing one or two structural breaks. The result shows that a unit root test with structural break leads to an increase in the number of countries with a steady state of the exchange rate, as this method reflects the effect of irresistible factors on smoothness. In general, 43 countries or regions have a steady series of the real effective exchange rate, which means that 67.19% of them follow mean reversion, confirming the validity of the PPP theory. Developed countries (regions) and emerging countries (regions) are steady overall, and the opposite is true for frontier countries (regions).

PURCHASING POWER PARITY THEORY: A CROSS-SECTIONAL DEPENDENCE PANEL DATA ANALYSIS OF SIXTEEN DEVELOPED COUNTRIES

This paper examined the purchasing power parity (PPP) theory for a group of sixteen developed countries using powerful statistical panel data methods that account for cross-sectional dependence. The paper utilized the Pesaran panel unit root test, the cointegration test of Westerlund, the Augmented Mean Group (AMG) estimator, the Common Correlated Effect Mean Group (CCEMG) estimator, and the panel data Granger non-causality test of Dumitricus and Hurlin to analyze the causal relationships among the variables involved in the study. The tests showed that the PPP theory occurs in this group of countries. Furthermore, outcomes of the long-run estimation revealed both depreciation and appreciation of the nominal exchange rates. Apart from providing important policy implications on the results obtained, this paper made another significant contribution by extending the linear AMG and CCEMG estimators into nonlinear estimators and further used them in examining the long-run PPP theory.

Modelování rovnovážných odchylek měnových kurzů od parity kupní síly na datech pro 34 zemí v letech 2000-2020

We construct a simple model of exchange rates stemming from the methodology of behavioural equilibrium exchange rate (BEER) models on annual panel data for 34 countries with a floating exchange rate regime during the period 2000-2020. The basic building block of the model is the absolute version of purchasing power parity theory (the ratio of domestic and foreign price levels), further extended by other variables rooted in economic theory. A complementary interpretation of our approach could be a measurement of exchange rate deviations from purchasing power parity caused by variation in economic fundamentals. The results suggest that purchasing power parity is an appropriate reference point for exchange rate models. Furthermore, national currencies tend to be stronger against the euro with higher GDP per capita, interest rates, investment freedom, urbanization rate and terms of trade, and with lower inflation. The presented deviations of exchange rates from the model equilibrium are significantly lower than those implied by a naïve model based on purchasing power parity alone.

MIST Ülkelerinde Satın Alma Gücü Paritesi Geçerli mi?

Satın Alma Gücü Paritesi (SAGP) ekonomi ve finans literatüründe oldukça ilgiyle incelenen konularından biridir. SAGP ülkeler arasında bulunan fiyat seviyesi farklılıklarını ortadan kaldırarak çeşitli para birimlerinin satın alma güçlerini eşitleyen değişim oranını ifade etmektedir. Çeşitli ülke veya ülkelerde çeşitli yöntemler kullanılarak SAGP hipotezinin geçerliliği test edilmiştir. Bu çalışmada ise SAGP teorisinin 1994:01-2022:01 dönemi için MIST (Meksika, Endonezya, Güney Kore ve Türkiye) ülkelerinde geçerli olup olmadığının incelenmesi amaçlanmaktadır. Bu amaç çerçevesinde reel döviz kurlarının durağan olup olmadıklarını analiz etmek için panel birim kök testleri kullanılmaktadır. Birimler arasında yatay kesit bağlılığının bulunmasından dolayı çalışmada bu bağımlılığı göz önüne alan ikinci kuşak birim kök testlerinden Carrion-i-Silvestre vd. (2005) tarafından geliştirilen PANKPSS ve Pesaran (2007) tarafından geliştirilen CADF testleri kullanılmaktadır. CADF testi ile elde edilen bulgular serinin durağan olmadığı ve SAGP teorisinin geçerli olmadığını ortaya koyarken, yapısal kırılmaları dikkate alan PANKPSS testine ait bulgular neticesinde ise serinin durağan olduğu ve SAGP teorisinin desteklendiği sonucuna varılmıştır.

Theories of Exchange Rate Determination: A Brief Theoretical Review

This paper endeavored to categorise and evaluate exchange rate theories. These theories included the International Fischer's Effect Theory, the Purchasing Power Parity Theory, the Interest Rate Parity Theory, the Balance of Payments Theory, the Monetary Approach to Foreign Exchange, and the Portfolio Balance Approach. The paper analyses these theories' advantages and disadvantages. Keywords: Exchange Rate; Purchasing Power Parity Theory; Interest Rate; Portfolio Balance Approach; Monetary Approach; Foreign Exchange DOI: 10.7176/EJBM/14-20-08 Publication date: October 31 st 2022

Understanding International Price and Consumption Disparities

AbstractThis study proposes a new measure of the tradability of 120+ commodities based on price dispersion. This approach is used to construct price indices of tradables and non‐tradables for 150+ countries. The expenditure share of tradables is lower for richer countries, while the relative price of non‐tradables, which plays an important role in the determination of real exchange rates, is higher. Secondly, a common‐factor approach (based on principal components) is introduced to compress the large volume of information on prices and quantities consumed globally. We find that cross‐commodity correlations are higher for prices than for consumption. In addition, income is responsible for most of the variation in the first principal component of consumption but explains less of the first price component. This suggests consumption are driven primarily by domestic factors, while prices are determined by factors outside the country, along the lines of the Purchasing Power Parity theory.

Rupiah Exchange Rate Fluctuations in The US Dollar, Purchasing Power Parity Theory and Fisher Effect Theory Testing

Abstract: Rupiah Exchange Rate Fluctuations in The US Dollar, Purchasing Power Parity Theory and Fisher Effect Theory Testing. To test the accuracy of the power purchasing parity theory and the international fisher effect theory on fluctuations in the Rupiah exchange rate against the United States Dollar. The goal of this study is to examine if the power purchasing parity theory and the international fisher effect theory are valid when it comes to Rupiah-US Dollar exchange rate movements. The purpose of this research is to figure out the rate of inflation, interest rate, and movement of the rupiah against the US dollar. This research examined historical data on the rupiah exchange rate against the US dollar, interest rates, and inflation rates in Indonesia and the United States from January 2015 through December 2020. In this research, multiple linear regression analysis was used. Research proved that the theory of power purchasing parity applies to changes in the Indonesian rupiah exchange rate on the US dollar. The international fisher effect does not apply to changes in the Indonesian Rupiah currency rate against the US dollar, which proves the existence of theoretical deviations that result in the invalidity of this theory.Keywords: purchasing power parity, international fisher effect, exchange rateAbstrak: Fluktuasi Nilai Tukar Rupiah dalam Dollar US, Pengujian Teori Paritas Daya Beli dan Teori Fisher Efek. Tujuan dari penelitian ini adalah untuk menguji keakuratan volatilitas nilai tukar rupiah terhadap dolar AS dalam teori paritas daya beli (PPP) dan teori dampak fisher internasional. Variabel dalam penelitian ini adalah inflasi, suku bunga, dan pergerakan nilai tukar rupiah terhadap dolar AS. Data yang digunakan dalam penelitian adalah data historis nilai tukar Rupiah terhadap dolar Amerika Serikat dan tingkat suku bunga Indonesia dan Amerika Serikat serta tingkat inflasi dari bulan Januari 2015 sampai dengan Desember 2020. Metode dalam penelitian adalah: Analisis regresi linier berganda. Penelitian membuktikan bahwa teori power purchasing parity berlaku pada perubahan kurs mata uang Rupiah Indonesia pada Dollar Amerika Serikat. Teori internasional fisher effect tidak berlaku berlaku pada perubahan kurs mata uang Rupiah Indonesia pada Dollar Amerika Serikat, yang membuktikan adanya penyimpangan teori yang mengakibatkan tidak berlakunya teori ini.Kata kunci: paritas daya beli, internasional efek fisher, perubahan kurs

Statistical Analysis of the Purchasing Power Parity Theory for Five Southeast Asian Countries

For more than a decade, there has been substantial interest in testing for the validity of the Purchasing Power Parity (PPP) statistically. This paper utilised a series of statistical tests to ascertain if the PPP theory is valid for a group of five Southeast Asian countries from 2000 to 2016 using monthly data. For this purpose, we conducted four different panel unit root (stationarity) tests, two cointegration tests (Pedroni and Westerlund), and also, the vector autoregressive (VAR) model. The stationarity (unit root) tests reveal that the variables tested are non-stationary at levels but stationary at the first difference, results of the cointegration tests did not reject the null hypothesis of no cointegration meaning there is no long-run relationship between the variables and results of the VAR model did not reveal a strong short-run relationship. Based on the results, we, therefore, conclude that PPP is not valid both in the long-run and short-run in the five Southeast Asian countries between 2000 and 2016. This implies that prices of goods are expected to be different in these countries. Meaning that a businessman can make more profits from buying goods that are cheaper in one of these countries and selling at a higher rate in one of these countries where the goods are more expensive.

Long memory estimation in a non-Gaussian bivariate process

The main objective of this paper is to analyze fluctuations of foreign currency exchange rates and to identify / describe the dependence structure in stochastic processes associated with the foreign exchange market. Specifically, the study focuses on the dependence relationship between two currencies and the stochastic process underlying them. A general novel methodology is introduced, and shown to work satisfactorily on a variety of problems analyzing the bivariate financial time series possibly possessing heavy tails. This methodology can be used as powerful tool to improve the prediction of exchange rate fluctuations, which is key decision taking in monetary and fiscal policy. In the wider spectrum it can help to predict financial crises. The results could also serve to explain why the Purchasing Power Parity theory does not always hold.

Empirical Testing of Purchasing Power Parity Validity in Selected European Union Countries

Abstract In this article, the authors carried out an empirical analysis of the validity of purchasing power parity (PPP) in Slovenia, Croatia, the Czech Republic, Slovakia and Austria. The results provide mixed support for PPP, which is typical for extransition economies. In the first phase of the empirical part of the research, the authors tested the stationarity of the real exchange rate in a logarithm, while in the second phase, the cointegration of nominal exchange rate, domestic and foreign price levels was tested.The Vector Error Correction Model (VECM) was used in the third phase to test if the signs of variables are in accordance with economics and econometrics theories, while in the final phase, restrictions were imposed for the symmetry and proportionality of coefficients. Slovenia is subject to limitations on the symmetry and proportionality of coefficients, which means the validity of both the absolute and relative versions of the PPP theory. Croatia is subject to a limitation on symmetry, but not to a limit on the proportionality of coefficients, which means the validity of the relative version of the PPP theory. In the case of the Czech Republic, Slovakia and Austria, restrictions on the symmetry and proportionality of the coefficients do not apply, which consequently constitutes an invalidity of both versions. However, to the authors’ knowledge, and taking into account Liu (1992), who states that it is more important to check the presence of co-integration than to check the symmetry and proportionality of the coefficients, since there is a cointegratation between the nominal exchange rate, foreign prices and domestic prices, the theory of PPP is valid for all the selected countries. The empirical results suggest that all the real exchange rate time series are stationary, additionally, cointegration exists among all the variables for all countries, and the signs of coefficients are statistically significant for all variables in all countries, however, the coefficient restrictions are only statistically significant in Slovenia and Croatia.

TESTING THE PURCHASING POWER PARITY HYPOTHESIS FOR BRICS: EVIDENCE FROM THE FOURIER UNIT ROOT AND COINTEGRATION TEST

This study is a review of the purchasing power parity hypothesis applied to BRICS countries (Brazil, Russia, India, China, and South Africa). For each country, time series based on a Fourier perspective were applied. The initial stages of the study analyzed the stationarity of the series using Fourier unit root testing. The series were found to be stationary at level I(1), paving the way for the Fourier Shin cointegration test, which constituted the second stage. The analysis revealed cointegration associations with all BRICS countries. Hence, it is understood that the purchasing power parity theory applies for all five countries.

Pembuktian Konsep Law Of One Price (LOOP) Dalam Absolute Purchasing Power Parity Menggunakan The Big Mac Index Antar Negara The Six Cheapest (Indonesia – Malaysia) Per Juli 2021

This study aims to prove the existence of the absolute purchasing power parity theory using The Big Mac Index and take the example of The Six Cheapest countries, two of which are Indonesia and Malaysia. The data taken is secondary data that has been measured and processed by The Economist which contains the prices of the Big Mac units sold by each country, in The Big Mac Index is 56 countries with different incomes. The method used is a descriptive method, with the literature method technique. The results show that in the end absolute purchasing power parity will not be formed in the free market. This is stated by the non-meeting points of purchasing power parity under conditions of real consumption. Also, it is proven by the undervalued value of the rupiah and ringgit in Indonesia and Malaysia against the US dollar, as well as the level of consumption of each country that must be adjusted.

Revisiting the effects of the Spectre and Meltdown patches using the top-down microarchitectural method and purchasing power parity theory

Software patches are made available to fix security vulnerabilities, enhance performance, and usability. Previous works focused on measuring the performance effect of patches on benchmark runtimes. In this study, we used the Top-Down microarchitecture analysis method to understand how pipeline bottlenecks were affected by the application of the Spectre and Meltdown security patches. Bottleneck analysis makes it possible to better understand how different hardware resources are being utilized, highlighting portions of the pipeline where possible improvements could be achieved. We complement the Top-Down analysis technique with the use a normalization technique from the field of economics, purchasing power parity (PPP), to better understand the relative difference between patched and unpatched runs. In this study, we showed that security patches had an effect that was reflected on the corresponding Top-Down metrics. We showed that recent compilers are not as negatively affected as previously reported. Out of the 14 benchmarks that make up the SPEC OMP2012 suite, three had noticeable slowdowns when the patches were applied. We also found that Top-Down metrics had large relative differences when the security patches were applied, differences that standard techniques based in absolute, non-normalized, metrics failed to highlight.

Purchasing Power Parity in Pakistan: Evidence from Fourier Unit Root Tests

ABSTRACT The paper empirically examines the validity of purchasing power parity (PPP) in Pakistan. For this purpose, unit root properties of real exchange rates (RERs) of Pakistan against its 21 major trading partners are examined using Fourier ADF (FADF) and Fourier KPSS (FKPSS) unit root tests for the period 1983Q1 to 2014Q4. Fourier unit root tests are used as they consider multiple temporary structural breaks and nonlinearity of the data. FADF test rejects the null hypothesis of unit root (non-stationary) in three RER series, while FKPSS test rejects the null hypothesis of stationary in nine RER series. Thus, FADF unit root test provide support for PPP hypothesis in three exchange rate series, while FKPSS test validates PPP theory in 12 exchange rate series. For robustness analysis, PPP equation is also estimated using regression analysis. The regression results show that PPP hypothesis is valid for nine exchange rate series. These findings suggest that PPP hypothesis partially holds in Pakistan.

Testing the Validity of The Purchasing Power Parity Theory in Selected Integration Organizations by Using the Fourier Function with Fractional Unit Roots

Satın alma gücü paritesinin özel terminolojisi, I. Dünya Savaşı’ndan sonraki yıllarda, başlıca sanayileşmiş ülkeler arasında, uluslararası politika tartışmalarının merkezine oturmuştur. Bu çalışmada, Fourier fonksiyonları kullanılarak, fraksiyonel birim kök incelemesi yapılmıştır. Teorem 1960-2019 dönemi için NAFTA, MERCOSUR, AB15 ve seçilmiş OECD ülkeleri gibi farklı entegrasyon örgütleri kapsamında ele alınmıştır. Çalışmada, Kesirli Frekanslı Fourier ADF ve geleneksel ADF testleri yapılmıştır. Trigonometrik terimleri anlamsız olan ülkelerde geleneksel ADF sonuçları hesaplanmıştır. Analiz sonuçlarına göre, MERCOSUR hariç diğer entegrasyon şekillerinde satın alma gücü paritesi hipotezinin geçerli olduğu tespit edilmiştir.