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Purchasing power parity-symmetry and proportionality: Evidence from 116 countries

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  • Arize, Augustine C.
  • Malindretos, John
  • Ghosh, Dilip

Abstract

This paper examines the cointegration property of exchange rates and prices using techniques that have received limited attention in several studies on the validity of the Purchasing Power Parity (PPP) hypothesis. It provides comprehensive evidence on the PPP hypothesis using recent monthly data for 1971 through 2011 (i.e., 492 observations). The paper also explores the symmetry and proportionality conditions in PPP. In addition, estimates of the short-run dynamics are obtained for each country, utilizing the error–correction technique. Results from long-run cointegration analysis, short-run dynamics and half-lives, all provide evidence for long-run PPP. The symmetry condition is largely supported, and when imposed on prices, the proportionality condition is supported in a majority of cases.

Suggested Citation

  • Arize, Augustine C. & Malindretos, John & Ghosh, Dilip, 2015. "Purchasing power parity-symmetry and proportionality: Evidence from 116 countries," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 69-85.
    • Handle: RePEc:eee:reveco:v:37:y:2015:i:c:p:69-85
    DOI: 10.1016/j.iref.2014.11.014
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    More about this item

    Keywords

    PPP; Cointegration; Error correction model;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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