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Is The Real Effective Exchange Rate Biased Against the PPP Hypothesis?

  • Frederick H Wallace

    ()

    (University of Minnesota, Morris)

  • Daniel Ventosa-santaulària

    ()

    (CIDE)

  • Manuel Gómez-zaldívar

    ()

    (Universidad de Guanajuato)

We show that the use of the real effective exchange rate to test for purchasing power parity, as in Astorga (2012) and other studies, is subject to a problem that biases tests against finding evidence of PPP. The problem is illustrated using Astorga´s data on six Latin American countries.

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File URL: http://www.accessecon.com/Pubs/EB/2014/Volume34/EB-14-V34-I1-P37.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 34 (2014)
Issue (Month): 1 ()
Pages: 395-399

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Handle: RePEc:ebl:ecbull:eb-13-00483
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  1. Alan M. Taylor, 2000. "A Century of Purchasing-Power Parity," NBER Working Papers 8012, National Bureau of Economic Research, Inc.
  2. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  4. Arize, Augustine C., 2011. "Purchasing power parity in LDCs: An empirical investigation," Global Finance Journal, Elsevier, vol. 22(1), pages 56-71.
  5. Sollis, Robert & Leybourne, Stephen & Newbold, Paul, 2002. "Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 686-700, August.
  6. Mohsen Bahmani-Oskooee & Ali M. Kutan & Su Zhou, 2008. "Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries," Southern Economic Journal, Southern Economic Association, vol. 74(4), pages 1049-1062, April.
  7. Andrews, Donald W K, 1993. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models," Econometrica, Econometric Society, vol. 61(1), pages 139-65, January.
  8. Bahmani-Oskooee, Mohsen & Hegerty, Scott W. & Kutan, Ali M., 2009. "Is PPP sensitive to time-varying trade weights in constructing real effective exchange rates?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1001-1008, August.
  9. George Kapetanios, 2005. "Unit-root testing against the alternative hypothesis of up to m structural breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 26(1), pages 123-133, 01.
  10. Astorga, Pablo, 2012. "Mean reversion in long-horizon real exchange rates: Evidence from Latin America," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1529-1550.
  11. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  12. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
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