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Purchasing Power Parity In China: An Empirical Investigation Based On Bootstrap Rollingwindow Test

Author

Listed:
  • Kai-Hua WANG

    (Department of Finance, Ocean University of China, Qingdao, Shandong, China, 266100)

  • Chi-Wei SU

    (Department of Finance, Ocean University of China, Qingdao, Shandong, China, 266100)

  • Hsu-Ling CHANG

    (Department of Accounting and Information, Ling Tung University.)

  • Ji MA

    (Department of Finance, Ocean University of China, Qingdao, Shandong, China, 266100.)

  • Cristina IOVU

    (Bucharest Academy of Economic Studies, Romania.)

Abstract

This paper aims to assess whether the purchasing power parity (PPP) holds by examining the dynamic link between nominal exchange rate (NER) and relative consumer price (RCP) in China. Because of existing economic transitions and structural breaks, we discover that there is no relationship between NER and RCP to support the PPP by using full sample data. Hence, we employ the rolling window causality method to reexamine the causal relation and the results show that PPP sets up only for a short period of time. Exchange rate reform, trade cost, restrictions and imperfect competition can be utilized to explain the deviations in most time of the sample. Therefore, this empirical result has important implications for stakeholders to distinguish` factors that bring about the PPP deviations and further offers policy suggestions for the Chinese monetary authority.

Suggested Citation

  • Kai-Hua WANG & Chi-Wei SU & Hsu-Ling CHANG & Ji MA & Cristina IOVU, 2017. "Purchasing Power Parity In China: An Empirical Investigation Based On Bootstrap Rollingwindow Test," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 166-181, December.
    • Handle: RePEc:rjr:romjef:v::y:2017:i:4:p:166-181
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    More about this item

    Keywords

    Consumer Price Index; exchange rate; rolling window; bootstrap; timevarying causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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