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Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data

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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," CIRJE F-Series CIRJE-F-318, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2005cf318
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2005/2005cf318.pdf
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    References listed on IDEAS

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    1. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
    2. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
    3. Yotopoulos,Pan A., 1996. "Exchange Rate Parity for Trade and Development," Cambridge Books, Cambridge University Press, number 9780521482165, Fall.
    4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    5. Ghura, Dhaneshwar & Grennes, Thomas J., 1993. "The real exchange rate and macroeconomic performance in Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 42(1), pages 155-174, October.
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    Cited by:

    1. Yasuyuki Sawada & Pan A. Yotopoulos, 2006. "Growth and Poverty Reduction Under Globalization: The Systematic Impact of Exchange Rate Misalignment," Discussion Papers 06-014, Stanford Institute for Economic Policy Research.
    2. Arun Muralidhar & Masakazu Arikawa, 2007. "Hedging Currency Risk In International Investment And Trade," CARF F-Series CARF-F-090, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Hsing, Yu, 2009. "Analysis of the Behavior of the New Zealand Dollar Exchange Rate: Comparison of Four Major Models," Review of Applied Economics, Review of Applied Economics, vol. 5(1-2).
    4. 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.
    5. Mostafa Goudarzi & Komeil Khanarinejad & Zahra Ardakani, 2012. "Investigation of the Factors Affecting Real Exchange Rate in Iran," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 4(4), pages 55-67, August.
    6. Shehu Usman Rano Aliyu, 2010. "Exchange rate volatility and export trade in Nigeria: an empirical investigation," Applied Financial Economics, Taylor & Francis Journals, vol. 20(13), pages 1071-1084.
    7. Jovanovic, Branimir, 2007. "Calculating the Fundamental Equilibrium Exchange Rate of the Macedonian Denar," MPRA Paper 43161, University Library of Munich, Germany.
    8. Gábor Oblath & Andrzej Slawinski & Arno Tausch, 2006. "Monthly Report 7/2006," wiiw Monthly Reports 2006-07, The Vienna Institute for International Economic Studies, wiiw.
    9. Vincentas Giedraitis & Sarunas Girdenas, 2010. "Feeling The Heat: Financial Crises And Their Impact On Global Climate Change," Perspectives of Innovation in Economics and Business (PIEB), Prague Development Center, vol. 4(1), pages 7-10, February.
    10. repec:sgh:gosnar:y:2017:i:5:p:5-30 is not listed on IDEAS

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