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Digging Out the PPP Hypothesis: an Integrated Empirical Coverage

  • Miguel de Carvalho

    ()

    (Ecole Polytechnique Federale de Lausanne, Institute of Mathematics)

  • Paulo Julio

    ()

    (Gabinete de Estrategia e Estudos, Ministry of Economy, Innovation, and Development)

We use several popular tests to test the validity of the Purchasing Power Parity (PPP) hypothesis. In particular, we analyze four classes of tests { standard univariate unit root tests, co-integration, panel unit root tests and unit root tests for nonlinear frameworks {, for a dataset consisting of 20 bilateral exchange rates. Through this approach, we ascertain the e ectiveness of each methodology in assessing the validity of PPP. Overall, our results suggest little evidence to support PPP. Among the conducted tests, the panel analysis of nonstationarity idiosyncratic and common components provides the richest insights by disentangling the possible sources of non-stationarity of real exchange rates. The relevance of using price indexes with di erent characteristics is also pinpointed.

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Paper provided by Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação in its series GEE Papers with number 0024.

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Length: 39 pages
Date of creation: Sep 2010
Date of revision: Sep 2010
Handle: RePEc:mde:wpaper:0024
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