Advanced Search
MyIDEAS: Login to save this article or follow this journal

Unreal exchange rates: a simulation-based approach to adjust misleading PPP estimates

Contents:

Author Info

  • Pär Sjölander

Abstract

Purpose – In what seems as an infinitely ongoing debate regarding the purchasing power parity (PPP) theory, this paper seeks to question the strength of the scientific “evidence” put forward by the PPP revisionists Design/methodology/approach – In this paper, the validity of the PPP revisionists' scientific evidence supporting long-run PPP is questioned based on the replication of an influential review study that is considered by PPP revisionists to exhibit “some of the strongest evidence” in favour of the PPP theory. Findings – By simulation experiments it is demonstrated that the traditional PPP unit root tests are non-robust to the empirically identified (G)ARCH distortions. Due to (G)ARCH distortions, over-rejections for the traditional unit root tests are shown to be a problem that potentially misleads researchers to believe that long-run PPP holds under circumstances when it is in fact not valid. As a potential remedy to this problem, a new unit root test is introduced which is robust to conditional heteroscedasticity disturbances, and in contrast to traditional unit root tests, it exhibits no significant empirical support for the PPP theory. Originality/value – The study illustrates that the PPP revisionists' unit root tests cannot reliably test the PPP hypothesis in the presence of (G)ARCH distortions, due to bad power and size properties. Perhaps it is time to conclude that, based on the currently existing research, it is virtually impossible to empirically come to a credible conclusion regarding whether long-run PPP holds or not.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=D097CB3A5B50043B7CD79A2795A557DC?contentType=Article&contentId=1621156
Download Restriction: Cannot be freely downloaded

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 34 (2007)
Issue (Month): 3 (September)
Pages: 256-288

as in new window
Handle: RePEc:eme:jespps:v:34:y:2007:i:3:p:256-288

Contact details of provider:
Web page: http://www.emeraldinsight.com

Order Information:
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
Email:
Web: http://www.emeraldinsight.com/jes.htm

Related research

Keywords: Exchange rates; Purchasing power;

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Mohsen Bahmani-Oskooee & Tsangyao Chang & Kuei-Chiu Lee, 2014. "Purchasing Power Parity in the BRICS and the MIST Countries: Sequential Panel Selection Method," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 1-12, Feburary.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eme:jespps:v:34:y:2007:i:3:p:256-288. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.