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Digging Out the PPP Hypothesis: an Integrated Empirical Coverage

Author

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  • Miguel de Carvalho

    (Ecole Polytechnique Fédérale de Lausanne, Institute of Mathematics)

  • Paulo Júlio

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

Abstract

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.

Suggested Citation

  • Miguel de Carvalho & Paulo Júlio, 2010. "Digging Out the PPP Hypothesis: an Integrated Empirical Coverage," GEE Papers 0024, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Sep 2010.
    • Handle: RePEc:mde:wpaper:0024
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    2. Raihan, Selim & Abdullah, S M & Barkat, Aroni & Siddiqua, Salina, 2017. "Mean Reversion of the Real Exchange Rate and the validity of PPP Hypothesis in the context of Bangladesh: A Holistic Approach," MPRA Paper 77172, University Library of Munich, Germany.
    3. Fumitaka Furuoka, 2015. "Electricity consumption and economic development in Asia: new data and new methods," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 29(1), pages 102-125, May.
    4. Mücahit Aydın, 2019. "Investigation of the Validity of Purchasing Power Parity Hypothesis with Fourier Unit Root Tests: The Case of Turkey," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 30(0), pages 35-48, June.
    5. Xie, Zixiong & Chen, Shyh-Wei & Hsieh, Chun-Kuei, 2021. "Facing up to the polysemy of purchasing power parity: New international evidence," Economic Modelling, Elsevier, vol. 98(C), pages 247-265.
    6. M. de Carvalho & K. F. Turkman & A. Rua, 2013. "Dynamic threshold modelling and the US business cycle," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 62(4), pages 535-550, August.
    7. Asuamah Yeboah, Samuel, 2017. "Is purchasing power parity hypothesis valid in Ghana? An empirical assessment," MPRA Paper 99394, University Library of Munich, Germany.

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    More about this item

    Keywords

    PPP; Real exchange rate; Unit roots; Co-integration; Panel; Nonlinear models; Cross-sectional dependence;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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