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Does the Purchasing Power Parity Hold in Emerging Markets? Evidence from Black Market Exchange Rates

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Author Info
Cerrato, Mario (London Metropolitan University)
Nicholas Sarantis

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Abstract

We examine the Purchasing Power Parity (PPP) hypothesis using a unique panel of monthly data on black market exchange rates for twenty emerging market economies over the period 19973M1-1993M12. We apply a large number of recent heterogeneous panel unit root and cointegration tests. Panel unit root tests do not favour mean reversion in the real black market exchange rate. The evidence for non-rejection of the unit root hypothesis remains robust even after allowing for structural breaks. Panel cointegration tests support evidence of cointegration between the nominal exchange rate and relative prices. These results contrast with those obtained from unit root tests. Since we believe that the former may be biased by the imposition of the joint symmetry and proportionality restriction, we test for such a restriction using likelihood ratio tests and find that it is strongly rejected.

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File URL: http://repec.org/res2003/Cerrato.pdf
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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 40.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:40

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Web page: http://www.res.org.uk/society/annualconf.asp
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Related research
Keywords: black market exchange rates purchasing power parity panel unit root and cointegration tests

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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