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Do trade frictions distort the purchasing power parity (PPP) hypothesis? A closer look

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  • Bonga-Bonga, Lumengo

Abstract

This paper explores whether trade frictions are the primary barrier preventing the Purchasing Power Parity (PPP) hypothesis from holding true between trading nations. It specifically examines the influence of exchange controls, a form of trade friction, on the relationship between an emerging economy, South Africa, and its primary trading partners, categorized based on whether they implement exchange control regulations or not. The methodology employed incorporates nonlinearity through quantile unit root tests and quantile cointegration, aiming to account for diverse economic conditions between trading nations. Empirical results suggest that the PPP hypothesis is more valid between countries with similar economic frameworks and synchronized business cycles. We propose that trade frictions might not necessarily inhibit the PPP hypothesis from being valid among nations with aligned economic structures that react similarly to global economic disturbances.

Suggested Citation

  • Bonga-Bonga, Lumengo, 2023. "Do trade frictions distort the purchasing power parity (PPP) hypothesis? A closer look," MPRA Paper 119196, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119196
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    More about this item

    Keywords

    PPP hypothesis; quantile cointegration; unit root test; exchange control.;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F3 - International Economics - - International Finance

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