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Another look at long-run purchasing power parity using Sims tests for unit roots

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  • Jacquelynne Mclellan
  • Debasish Chakraborty

Abstract

This paper tests for long-run PPP using two types of unit root tests, standard Dickey-Fuller (DF) or Augmented Dickey-Fuller (ADF) tests and Bayesian Sims tests. A problem with DF and ADF tests has been the low power of the tests; that is, such tests have difficulty in rejecting the random-walk hypothesis for real exchange rates. Sims tests, in contrast, do not give undue weight to the unit root. Instead Sims tests use a Bayesian posterior odds ratio which spreads the probability uniformly on the [0,1] interval. Monthly data for several industrialized and less-developed countries are used. Results indicate that real exchange rates do not appear to follow a random walk. While short-run deviations from PPP do occur, they fade in the long run.

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  • Jacquelynne Mclellan & Debasish Chakraborty, 1997. "Another look at long-run purchasing power parity using Sims tests for unit roots," Applied Economics Letters, Taylor & Francis Journals, vol. 4(8), pages 473-476.
    • Handle: RePEc:taf:apeclt:v:4:y:1997:i:8:p:473-476
    DOI: 10.1080/758536628
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    References listed on IDEAS

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    Cited by:

    1. Goldman Elena & Tsurumi Hiroki, 2005. "Bayesian Analysis of a Doubly Truncated ARMA-GARCH Model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(2), pages 1-38, June.
    2. Alejandro D. Jacobo & Simón Sosvilla‐Rivero, 2021. "An empirical examination of purchasing power parity: Argentina 1810–2016," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2064-2073, April.
    3. Marcos José Dal Bianco, 2008. "Argentinean real exchange rate 1900-2006, test purchasing power parity theory," Estudios de Economia, University of Chile, Department of Economics, vol. 35(1 Year 20), pages 33-64, June.

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