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Does purchasing power parity hold in emerging markets? Evidence from a panel of black market exchange rates

  • Mario Cerrato

    (Centre for International Capital Markets, London Metropolitan University, UK)

  • Nicholas Sarantis

    (Centre for International Capital Markets, London Metropolitan University, UK)

We examine the purchasing power parity (PPP) hypothesis using a unique panel of monthly data on black market exchange rates for 34 emerging market economies. We apply a large number of recent heterogeneous panel unit root and cointegration tests. Panel unit root tests reject mean reversion in black market real exchange rates for most (but not all) emerging market economies. On the other hand, all panel cointegration tests provide strong evidence of cointegration between the nominal black market exchange rate and domestic and foreign prices for both individual countries and the full panel. Since we believe that the findings from unit root tests may be affected by the imposition of the joint symmetry and proportionality restriction due to trade restrictions and measurement errors, we test for such a restriction using likelihood ratio tests and find that it is strongly rejected. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.318
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 12 (2007)
Issue (Month): 4 ()
Pages: 427-444

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Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:4:p:427-444
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  1. 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.
  2. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  3. Chihwa Kao & Min-Hsien Chiang, 1999. "On the Estimation and Inference of a Cointegrated Regression in Panel Data," Center for Policy Research Working Papers 2, Center for Policy Research, Maxwell School, Syracuse University.
  4. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
  5. Mark Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 1-17.
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  7. Larsson, Rolf & Lyhagen, Johan & Löthgren, Mickael, 1998. "Likelihood-Based Cointegration Tests in Heterogeneous Panels," SSE/EFI Working Paper Series in Economics and Finance 250, Stockholm School of Economics, revised 27 Aug 1998.
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  10. Lothian, James R., 1997. "Multi-country evidence on the behavior of purchasing power parity under the current float," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 19-35, February.
  11. Yoosoon Chang, 2000. "Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency," CIRJE F-Series CIRJE-F-85, CIRJE, Faculty of Economics, University of Tokyo.
  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.
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  14. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
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  16. Phylaktis, Kate & Girardin, Eric, 2001. "Foreign exchange markets in transition economies: China," Journal of Development Economics, Elsevier, vol. 64(1), pages 215-235, February.
  17. Hamid Baghestani, 1997. "Purchasing power parity in the presence of foreign exchange black markets: the case of India," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1147-1154.
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