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Functional Forms and PPP: The Case of Canada, the EU, Japan, and the U.K

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Author Info
Hsing, Y ()
Abstract

This paper applies an extended Box-Cox model to test the functional form of the purchasing power parity hypothesis for Canada, the EU, Japan, and the U.K. Both the relative CPI and the relative PPI are considered in empirical work. The log-log form commonly chosen by most researchers can be rejected for Japan when the relative PPI is considered and the EU and the U.K. when the relative CPI or PPI is considered. The value of R2 is higher based on the relative PPI than that based on the relative CPI. None of the estimated elasticities is statistically equal to unity, suggesting that proportionality may not apply.

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Publisher Info
Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 9 (2009)
Issue (Month): 1 ()
Pages:
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Handle: RePEc:eaa:aeinde:v:9:y:2009:i:1_1

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Related research
Keywords: PPP; functional forms; proportionality; elasticity;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

References listed on IDEAS
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  1. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall. [Downloadable!] (restricted)
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  2. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May. [Downloadable!] (restricted)
    Other versions:
  3. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
    Other versions:
  4. Mark P. Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor and Francis Journals, vol. 16(1-2), pages 1-17, January. [Downloadable!] (restricted)
  5. Hsing, Yu, 1997. "The Fisher Hypothesis Revisited: New Evidence," Applied Economics, Taylor and Francis Journals, vol. 29(8), pages 1055-59, August. [Downloadable!] (restricted)
  6. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  7. Lothian, James R. & Taylor, Mark P., 2006. "Real Exchange Rates Over the Past Two Centuries : How Important is the Harrod-Balassa-Samuelson Effect?," The Warwick Economics Research Paper Series (TWERPS) 768, University of Warwick, Department of Economics. [Downloadable!]
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  8. Jörg Breitung & Bertrand Candelon, 2005. "Purchasing Power Parity during Currency Crises: A Panel Unit Root Test under Structural Breaks," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(1), pages 124-140, April. [Downloadable!] (restricted)
  9. Sarno, Lucio & Taylor, Mark P. & Chowdhury, Ibrahim, 2004. "Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 1-25, February. [Downloadable!] (restricted)
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  10. Walter Enders & Kamol Chumrusphonlert, 2004. "Threshold cointegration and purchasing power parity in the pacific nations," Applied Economics, Taylor and Francis Journals, vol. 36(9), pages 889-896, May. [Downloadable!] (restricted)
  11. Syed Abul Basher & Mohammed Mohsin, 2004. "PPP tests in cointegrated panels: evidence from Asian developing countries," Applied Economics Letters, Taylor and Francis Journals, vol. 11(3), pages 163-166, February. [Downloadable!] (restricted)
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  12. Jerry Coakley & Stuart Snaith, 2005. "Testing for symmetry and proportionality in a European panel," Applied Financial Economics, Taylor and Francis Journals, vol. 15(11), pages 745-752, July. [Downloadable!] (restricted)
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  13. Ebru Guven Solakoglu, 2006. "Testing purchasing power parity hypothesis for transition economies," Applied Financial Economics, Taylor and Francis Journals, vol. 16(7), pages 561-568, April. [Downloadable!] (restricted)
  14. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  15. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02. [Downloadable!] (restricted)
    Other versions:
  16. Cheung, Yin-Wong & Chinn, Menzie D. & Pascual, Antonio Garcia, 2005. "Empirical exchange rate models of the nineties: Are any fit to survive?," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1150-1175, November. [Downloadable!] (restricted)
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  17. Alba, Joseph D. & Papell, David H., 2007. "Purchasing power parity and country characteristics: Evidence from panel data tests," Journal of Development Economics, Elsevier, vol. 83(1), pages 240-251, May. [Downloadable!] (restricted)
  18. Yu Hsing, 2007. "The roles of the exchange rate and the foreign interest rate in Estonia's money demand function and policy implications," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(4), pages 221-224. [Downloadable!] (restricted)
  19. Dimitrios Sideris, 2006. "Purchasing Power Parity in economies in transition: evidence from Central and East European countries," Applied Financial Economics, Taylor and Francis Journals, vol. 16(1-2), pages 135-143, January. [Downloadable!] (restricted)
  20. Sarno, Lucio & Valente, Giorgio, 2006. "Deviations from purchasing power parity under different exchange rate regimes: Do they revert and, if so, how?," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3147-3169, November. [Downloadable!] (restricted)
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