Advanced Search
MyIDEAS: Login

PPP: a disaggregated view

Contents:

Author Info

  • Christoph Fischer

Abstract

By disaggregating price indices, it becomes apparent that the real exchange rate consists of the real exchange rate for a single good and a weighted sum of relative prices between goods. When applying a battery of panel unit root tests to this sum and its components, it is found that both the sum and the relative prices are non-stationary. This implies that PPP is invalid even if the LOP holds for all goods. The findings contrast with the result from panel unit root tests that real exchange rates as a whole are stationary. Several suggestions for solving the conflict are discussed.

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.tandfonline.com/doi/abs/10.1080/09603100500389218
Download Restriction: Access to full text is restricted to subscribers.

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 Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 16 (2006)
Issue (Month): 1-2 ()
Pages: 93-108

as in new window
Handle: RePEc:taf:apfiec:v:16:y:2006:i:1-2:p:93-108

Contact details of provider:
Web page: http://www.tandfonline.com/RAFE20

Order Information:
Web: http://www.tandfonline.com/pricing/journal/RAFE20

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Charles Engel, 1998. "Long-Run PPP May Not Hold After All," Working Papers 0050, University of Washington, Department of Economics.
  2. Clark, Peter K., 1988. "Nearly redundant parameters and measures of persistence in economic time series," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 447-461.
  3. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  4. Lucio Sarno & Mark P. Taylor, . "Real Exchange Rates under the Recent Float: Unequivocal Evidence of Mean Reversion," Economics and Finance Discussion Papers 97-14, Economics and Finance Section, School of Social Sciences, Brunel University.
  5. Sarno, Lucio & Taylor, Mark P, 1997. "The Behaviour of Real Exchange Rates During the Post-Bretton Woods Period," CEPR Discussion Papers 1730, C.E.P.R. Discussion Papers.
  6. Strauss, Jack & Yigit, Taner, 2003. "Shortfalls of panel unit root testing," Economics Letters, Elsevier, vol. 81(3), pages 309-313, December.
  7. Jose De Gregorio & Alberto Giovannini, 1993. "International Evidence on Tradables and Nontradable Inflation," NBER Working Papers 4438, National Bureau of Economic Research, Inc.
  8. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
  9. Matthew Higgins & Egon Zakrajsek, 1999. "Purchasing power parity: three stakes through the heart of the unit root null," Staff Reports 80, Federal Reserve Bank of New York.
  10. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles, 2002. " Series-Specific Unit Root Tests with Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(5), pages 527-46, December.
  11. Fleissig, Adrian R. & Strauss, Jack, 2000. "Panel unit root tests of purchasing power parity for price indices," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 489-506, August.
  12. O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February.
  13. 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.
  14. Parsley, David C & Popper, Helen A, 2001. "Official Exchange Rate Arrangements and Real Exchange Rate Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 976-93, November.
  15. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  16. Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
  17. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  18. Hsieh, David A., 1982. "The determination of the real exchange rate : The productivity approach," Journal of International Economics, Elsevier, vol. 12(3-4), pages 355-362, May.
  19. Wu, Jyh-Lin & Wu, Shaowen, 2001. "Is Purchasing Power Parity Overvalued?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 804-12, August.
  20. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc.
  21. Michael B. Devereux, 1997. "Real Exchange Rates and Macroeconomics: Evidence and Theory," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 773-808, November.
  22. Tsung-Wu Ho, 2002. "Searching Stationarity in the Real Exchange Rates: Application of the SUR Estimator," Open Economies Review, Springer, vol. 13(3), pages 275-289, July.
  23. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
  24. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  25. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  26. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  27. Tamim Bayoumi & Ronald MacDonald, 1999. "Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions," IMF Staff Papers, Palgrave Macmillan, vol. 46(1), pages 5.
  28. Coakley, Jerry & Fuertes, Ana-Marie, 2000. "Is There a Base Currency Effect in Long-Run PPP?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(4), pages 253-63, October.
  29. DeLoach, Stephen B, 2001. "More Evidence in Favor of the Balassa-Samuelson Hypothesis," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 336-42, May.
  30. Papell, David H & Theodoridis, Hristos, 2001. "The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 790-803, August.
  31. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  32. Blough, Stephen R, 1992. "The Relationship between Power and Level for Generic Unit Root Tests in Finite Samples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 295-308, July-Sept.
  33. Rudiger Dornbusch, 1985. "Purchasing Power Parity," NBER Working Papers 1591, National Bureau of Economic Research, Inc.
  34. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles S, 2001. "Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 482-93, August.
Full references (including those not matched with items on IDEAS)

Citations

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

Cited by:
  1. Fischer, Christoph & Porath, Daniel, 2006. "A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications," Discussion Paper Series 1: Economic Studies 2006,23, Deutsche Bundesbank, Research Centre.
  2. Bernd Schnatz, 2007. "Is reversion to PPP in euro exchange rates non-linear?," International Economics and Economic Policy, Springer, vol. 4(3), pages 281-297, November.

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:taf:apfiec:v:16:y:2006:i:1-2:p:93-108. 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: (Michael McNulty).

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.