Validity Of Purchasing Power Parity Research Articles

Testing the validity of purchasing power parity in alternative markets: Evidence from the fourier quantile unit root test

This study analyzes the long-run validity of purchasing power parity (PPP) in three types of market economies—developed, emerging, and frontier markets—using the Fourier quantile unit root test. The analyses are conducted on 45 countries, including 10 developed, 20 developing, and 15 frontier market economies, using monthly observations from 1993:1 to 2018:8. Conventional, nonlinear, and Fourier-type unit root tests are also employed for this purpose. The Fourier quantile unit root test results provide more evidence than other tests on the validity of PPP, showing that it is valid in 8 developed, 11 emerging, and 7 frontier market economies.

The Validity of Purchasing Power Parity in BRICS Countries

It is observed that purchasing power parity (PPP) as one of the controversial and most interesting topics of international macroeconomics literature is tested by using different econometric methods for certain countries and/or country groups by many researchers. The validity of PPP is important in terms of being a common exchange rate used in international comparison. In this context, the validity of relative purchasing power parities in the BRICS countries (Brazil, Russia, India, China and South Africa) were analysed for the January 1993-March 2015 period. Non-linear stationarity analysis was used in the study. According to the findings of the analysis, it was concluded that all of the BRICS countries have a non-linear structure; the PPP approach was valid for Brazil and South Africa, but not valid for Russia, India and China in the relevant period.

Further evidence on the validity of purchasing power parity in selected African countries

This article extended previous studies on testing the validity of purchasing power parity (PPP) in 16 African countries between 1970 M01 and 2017 M01. We employed these approaches: first, we investigated for the presence of unit roots in the real exchange rates (RERs) using the nonlinear ADF unit root test and the modified Wald-type test under an exponential smooth threshold autoregressive (ESTAR) framework; second, we used the detrended fluctuation analysis (DFA) to find out if RERs were mean- reverting by analyzing Hurst estimates of the RERs in absolute form and in a rolling window form. Finally, we used a nonlinear cointegration rank and score test to investigate if nominal exchange rates and relative prices are cointegrated. Our findings showed that RERs of each of the 16 countries in absolute form had unit roots and were not mean reverting. Also, nominal exchange rates and relative prices were not cointegrated. These findings indicate strong evidence against PPP theory in these countries. We, therefore, cannot use PPP as a basis for determining equilibrium exchange rates for these 16 countries. However, a time-varying DFA method on RERs provided mixed conclusions about the validity of PPP in these countries.

Purchasing power parity in ASEAN+3: an application of panel unit root tests

Abstract The paper assesses the existence of purchasing power parity (PPP) in ASEAN+3 economies taking into account EUR and USD as reference currencies. The research refers to the period from January 2000 to June 2017 and there are three points of view: we tested the period as a whole and then the pre-crisis period and the postcrisis period regarding the structural break due to the economic crisis. The evaluated economies include Brunei, Cambodia, China, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. A range of panel unit root tests are applied, covering the Levin, Lin and Chu test, the Breitung test, the Im, Pesaran and Shin test, the ADF-Fisher test and the PP-Fisher test. In cases where the unit root is rejected, the validity of PPP is confirmed. However, our results are ambiguous and depend on the selection of the base currency, the time period observed and on the choice of the methodology.

Regional Relative Price Disparities and Their Driving Forces

(ProQuest: ... denotes formulae omitted.)I.INTRODUCTIONThis paper studies relative price level convergence by utilizing panels of major cities in Korea. While substantial research continues to evaluate price level disparities in international context, there have been relatively lack of successful empirical studies investigating the validity of purchasing power parity (PPP) within a single currency area. To gain further insight for the sources of considerable and persistent price level dispersion, we employ formal statistical techniques to test whether intranational price level differentials tend to shrink over time with a special emphasis on their heterogeneous transitional behavior. Our empirical analysis explores potential explanations for why there is substantial deviation from PPP or markedly slow convergence by considering disaggregated CPI data classified according to consumption expenditure in addition to extant factors that are attributable to the PPP deviations, such as transportation costs, income, and input prices.The importance of understanding both time-series and cross-sectional properties of price dispersion measures has been underscored by researchers as well as policymakers. Since PPP has been a key building block of most open-economy macroeconomic models as the link between exchange rate and relative price levels, empirical validity of PPP is a long-standing issue. Ever since Rogoff (1996) articulated the PPP puzzle, a large number of papers have studied price level convergence with international data and potential sources of PPP deviation or slow price level convergence.1 This has also brought about interest in testing convergence in relative city price within a country to better understand difference in prices across locations, Beck, Hubrich, and Marcellino (2009), Cecchetti, Mark, and Sonora (2002), Parsley and Wei (1996), and Sonora (2008), to name a few. Unlike international data, it may be reasonable to conjecture that major cities of a country share relatively similar characteristics, and thus relative price dispersion is unlikely to be substantial. However, the conclusion regarding long-run patterns of price disparities across cities is somewhat mixed, whereas PPP clearly is violated in the short run in those studies. Interestingly, some studies argue that price level convergence rates within a country are somewhat longer than those estimated with international data (Cecchetti, Mark, and Sonora, 2002).Despite the fact that the deviation from PPP is well documented in international data and even within a country, there has not been an extensive study rigorously investigating the possibility of PPP among major cities in Korea.2 This motivates us to examine the long-run behavior of relative price level dispersion with a special emphasis on heterogeneous transition dynamics of individual prices. In addition, with disaggregated CPI data, the paper scrutinizes dynamic patterns of price disparities for consumption expenditure categories classified according to purpose.3 Our research has primarily three goals. First, we investigate whether there exist persistent regional price level disparities, and, if so, assess the extent of deviations from PPP. In addition, their dynamic patterns are also examined. Second, and more importantly, this paper aims to provide a better understanding of main factors that drive substantial price level disparities across cities. Third, as overall price divergence does not necessarily exclude the possibility of club convergence, we explore whether there is a subgroup of cities that share similar aspects in terms of socioeconomic variables and exhibit price level convergence among the member cities.To draw attention to the importance of regional price level dispersion, we first document some salient features of intercity price differentials.4 Some basic descriptive statistics of price differential variability and mean absolute log price differential indicate that there is little evidence of price level convergence. …

PPP and nonlinearity of real exchange rates: new evidence from transition economies

In this article, we investigate the Purchasing Power Parity (PPP) concept by utilizing a database of monthly real exchange rates from 12 Central and Eastern European economies with respect to different numeraire currencies. Owing to the elaborated limitations of linear specifications by verifying this exchange rate theory, we apply a nonlinear unit root test based on the Exponential Smooth Transition Autoregressive (ESTAR) model proposed by Kapetanios et al. (KSS; 2003). Our analysis shows that after taking into account the nonlinear reversion of real exchange rates of European transition economies with respect to the euro, the validity of PPP is confirmed for the majority of countries in the sample.

Purchasing power parity with flexible Fourier stationary test for Central and Eastern European countries

This study applies stationary test with a Fourier function proposed by Enders and Lee (2004, 2009) to test the validity of long-run Purchasing Power Parity (PPP) to assess the nonstationary properties of the Real Exchange Rate (RER) for seven Central and Eastern European Countries (CEECs). We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true data generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of PPP from the nonlinear point of view and provide robust evidence clearly indicating that the PPP holds true for all CEECs. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.

Flexible Fourier stationary test in purchasing power parity for African countries

This study applies stationary test with a Fourier function proposed by Enders and Lee (2004, 2009) to test the validity of long run Purchasing Power Parity (PPP) to assess the nonstationary properties of the real exchange rate for 20 African countries. We find that our approximation has higher power to detect U shaped breaks and smooth breaks than linear method if the true data generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of PPP from the nonlinear point of view and provide robust evidence clearly indicate that PPP holds true for almost African countries. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.

Purchasing power parity in major OPEC countries: flexible Fourier stationary test

This study applies stationary test with a Fourier function proposed by Enders and Lee (2004, 2009) to test the validity of long-run Purchasing Power Parity (PPP) to assess the nonstationary properties of the Real Exchange Rates (RERs) for seven major countries of the Organization of the Petroleum Exporting Countries (OPEC). We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true Data-Generating Process (DGP) of exchange rate is in fact a stationary nonlinear process. We examine the validity of PPP from the nonlinear point of view and provide robust evidence that clearly indicates that PPP holds true for six countries, namely Algeria, Angola, Indonesia, Kuwait, Nigeria and Saudi Arabia. Our findings point out their exchange rate adjustment mean-reverts towards PPP equilibrium values in a nonlinear way.

The Validity of Purchasing Power Parity in Central and Eastern European Countries: A Rolling Nonlinear Unit Root Test

The main aim of this paper is to examine the validity of the purchasing power parity (PPP) hypothesis for eight Central and Eastern European countries using both Kapetanios et al. (KSS) and rolling-KSS unit root tests. By employing the rolling-KSS unit root test, we aim to determine when the real exchange rates become non-stationary or nonlinear. The results of the KSS unit root test show that the PPP hypothesis is valid only for Romania while the results of the rolling-KSS unit root test reveal that the PPP hypothesiscan be rejected only for Poland in the all subsamples. On the other hand, we have found evidence of the validity of PPP for the remaining countries. Comparatively, the real exchange rates of Bulgaria and Romania were found to be characterized by nonlinearity in more subsamples in the rolling-KSS unit root test.

English

This study applies non-linear threshold unit-root test to assess the non-stationary properties of the real exchange rate for twenty African countries. We found that non-linear threshold unit-root test has higher power than linear method. As suggested by Caner and Hansen (2001), the true data generating process of exchange rate is a stationary non-linear process. We examine the validity of PPP from the non-linear point of view and provide robust evidence clearly indicating that purchasing power parity (PPP) holds true for six countries, namely; Egypt, Ethiopia, Gambia, Malawi, Seychelles and South Africa. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a non-linear way. Key words: Non-linear threshold unit-root test, purchasing power parity.

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.

Additional evidence of long-run purchasing power parity with black and official exchange rates

In this study, the validity of Purchasing Power Parity (PPP) hypothesis is investigated by using unit root test on official and black market exchange rates for Turkey. When we used the classical unit root test, we found poor evidence for the validity of PPP in classical PP test but no evidence for PPP in the augmented Dickey–Fuller test. However, by using Zivot–Andrews test allowing for one structural break in the series of PPP, we find stronger evidence for both official and black market exchange rates. Our findings illustrate that the unit root test with structural break is powerful than classical ones for long-run PPP.

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.

New evidence of the validity of purchasing power parity from Turkey

The validity of purchasing power parity (PPP) is examined between Turkey and trading partners, namely USA, Germany, Japan, France, Netherlands and UK. Different unit root test and different base countries are used to determine if the validity of PPP is influenced by the type of test and/or the base country. According to estimation results PPP in Turkey is sensitive to the choice of the base country and can be influenced by the type of test.

New evidence of the validity of purchasing power parity from Jordan

Most empirical studies on purchasing power parity (PPP) have focused on developed countries rather than developing countries. This study tests PPP in Jordan. Different unit root tests and three different base countries are used to determine if the validity of PPP is influenced by the type of test and/or the base country. The results show that PPP in Jordan is not sensitive to the choice of base country but is influenced by test type.

Purchasing power parity: further evidence and implications

This study tests the validity of the purchasing power parity (PPP) theory using a panel of ten Arab countries. It also measures the speed of convergence for the panel and for the Gulf Cooperation Council (GCC), including Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates which follow a hard dollar peg. The test is conducted using nine base currencies. The main findings are first on the validity of PPP. (1) The null of unit root is rejected using each of the nine currencies as a numeraire—the result appears to be invariant to the choice of the base currency. (2) The result appears to be stronger when the estimation is based on heterogeneous rather than homogeneous serial correlations among panel units. Secondly, on persistence. (3) The estimated average half-life of a shock to the real exchange rate in the full panel is 2.19 years. (4) The study reveals that for the GCC economies deviation from PPP will be more persistent due to the hard peg, the dollar volatility and the weak goods market arbit...

Purchasing Power Parity: Further Evidence and Implications

This study tests the validity of the purchasing power parity (PPP) theory using a panel of ten Arab countries. It also measures the speed of convergence for the panel and for the Gulf Cooperation Council (GCC), including Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates which follow a hard dollar peg. The test is conducted using nine base currencies. The main findings are first on the validity of PPP. (1) The null of unit root is rejected using each of the nine currencies as a numeraire—the result appears to be invariant to the choice of the base currency. (2) The result appears to be stronger when the estimation is based on heterogeneous rather than homogeneous serial correlations among panel units. Secondly, on persistence. (3) The estimated average half-life of a shock to the real exchange rate in the full panel is 2.19 years. (4) The study reveals that for the GCC economies deviation from PPP will be more persistent due to the hard peg, the dollar volatility and the weak goods market arbitrage. Clearly, the GCC countries will need to move to a more stable peg to be able to achieve the benefits they hope by engaging in a monetary union by 2010.