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Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data (Subsequently published in "Applied Financial Economics", 16, 127-134, 2006. )

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  • Pan A. Yotopoulos

    (University of Florence and (emeritus) Stanford University)

  • Yasuyuki Sawada

    (Faculty of Economics, University of Tokyo)

Abstract

We formulate and implement a new empirical procedure to examine the validity of PPP in the long-run for 153 countries by using the familiar cross-country data set of Heston, Summers, and Aten (2002). Unlike the existing studies that rely on mean reversion of real exchange rates, we explicitly examine country-specificity in the deviations of the nominal exchange rate from PPP. We find, first, that out of a total of 153 countries, 132 countries have achieved PPP within twenty years, 1980-2000 and 105 countries have attained PPP over ten years, 1990-2000. Second, according to the results, our method can be accepted as a workable shortcut of the direct, fullinformation approach of Yotopoulos (1996) that tests for long-run PPP utilizing micro-ICP data. This becomes an important characteristic of this paper since comprehensive micro-ICP data are no longer easily available. As a by-product, of the empirical validation of our shortcut approach, our empirical results are in favor of the Ricardo-Balassa-Samuelson effect.

Suggested Citation

  • Pan A. Yotopoulos & Yasuyuki Sawada, 2005. "Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data (Subsequently published in "Applied Financial Economics", 16, 127-134, 2006. )," CARF F-Series CARF-F-021, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf021
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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/29.pdf
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    References listed on IDEAS

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    Cited by:

    1. Yasuyuki Swada & Pan A. Yotopoulos, 2005. "Corner Solutions, Crises, and Capital Controls: A Theory and an Empirical Analyas on the Optimal Exchane Rate Regime in Emerging Economies," Discussion Papers 04-037, Stanford Institute for Economic Policy Research.
    2. Gábor Oblath & Andrzej Slawinski & Arno Tausch, 2006. "Monthly Report 7/2006," wiiw Monthly Reports 2006-07, The Vienna Institute for International Economic Studies, wiiw.
    3. Jovanovic, Branimir, 2007. "Calculating the Fundamental Equilibrium Exchange Rate of the Macedonian Denar," MPRA Paper 43161, University Library of Munich, Germany.

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