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Purchasing Power Parity and Country Characteristics: Evidence from Time Series Analysis

Author

Listed:
  • Chia-Cheng Ho

    (Department of Finance, National Chung Cheng University)

  • Su-Yin Cheng

    (Department of Finance, National Chung Cheng University)

  • Han Hou

    (Department of Finance, National Chung Cheng University)

Abstract

This paper investigates the relationships between country characteristics and the validity of PPP. We use three alternative time series methods to test for the stationarity of real exchange rates for each of the 72 countries over the period from 1976 to 2005. Our result shows that the evidence of PPP exhibits geographic difference. It is most likely to find stationary real exchange rates for European countries, whereas it is least likely to obtain the result of supporting PPP for Asian countries. We then use a probit regression model to examine if county characteristics are related to the validity of PPP. The probit regression result reveals that the validity of PPP decreases with inflation rate and increases with nominal exchange rate volatility.

Suggested Citation

  • Chia-Cheng Ho & Su-Yin Cheng & Han Hou, 2009. "Purchasing Power Parity and Country Characteristics: Evidence from Time Series Analysis," Economics Bulletin, AccessEcon, vol. 29(1), pages 444-456.
    • Handle: RePEc:ebl:ecbull:eb-08c20096
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    References listed on IDEAS

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    Cited by:

    1. Hsing Yu, 2015. "Short-Run Determinants of the IDR/USD Exchange Rate: A Simultaneous-Equation Model," Global Economy Journal, De Gruyter, vol. 15(3), pages 311-318, September.
    2. Yu Hsing, 2015. "Short-Run Determinants of the USD/MYR Exchange Rate," Economics Bulletin, AccessEcon, vol. 35(1), pages 97-105.

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    More about this item

    Keywords

    Purchasing power parity; Country characteristics; Unit root tests;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • F3 - International Economics - - International Finance

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