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Is the Relationship Between Prices and Exchange Rates Homogeneous?

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  • Stephen Hall
  • George Hondroyiannis
  • Amangeldi Kenjegaliev
  • P.A.V.B. Swamy
  • George S. Tavlas

Abstract

Empirical tests of purchasing power parity (PPP) are implicitly based on the conditions of symmetry and proportionality of the price coefficients. We investigate a separate condition, which we term homogeneity. Specifically, while there may be factors that drive a wedge between prices and exchange rates, when these factors are held constant we would expect a change in exchange rates to be associated with a proportional, or homogeneous, change in prices. To test for the existence of homogeneity in prices, we conduct two experiments. First, we apply a time-varying-coefficient procedure to nine euro-area countries as well as the euro area as a whole during the (monthly) sample period, 1999: M1 to 2011:M3. Second we apply the same procedure to the same group of countries, plus Canada, Japan and Mexico, over the longer period, 1957:M4 to 2011:M3. We find that averages of the price coefficients, corrected for specification biases, are uniformly homogeneous in the long run, providing strong support for PPP.

Suggested Citation

  • Stephen Hall & George Hondroyiannis & Amangeldi Kenjegaliev & P.A.V.B. Swamy & George S. Tavlas, 2013. "Is the Relationship Between Prices and Exchange Rates Homogeneous?," Discussion Papers in Economics 13/13, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:13/13
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    References listed on IDEAS

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    14. P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 293-306, May.
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    Cited by:

    1. George Hondroyiannis & Dimitrios Papaoikonomou, 2017. "The effect of card payments on vat revenue in Greece," Working Papers 225, Bank of Greece.
    2. Hondroyiannis, George & Papaoikonomou, Dimitrios, 2017. "The effect of card payments on VAT revenue: New evidence from Greece," Economics Letters, Elsevier, vol. 157(C), pages 17-20.
    3. Janice Breuer & Vikram Kumar & Shyam Suresh, 2015. "Inter-Temporal Purchasing Power Parity," Open Economies Review, Springer, vol. 26(5), pages 869-891, November.
    4. Giorgio Canarella & Stephen Miller & Stephen Pollard, 2014. "Purchasing Power Parity Between the UK and Germany: The Euro Era," Open Economies Review, Springer, vol. 25(4), pages 677-699, September.
    5. Pilbeam, K. & Litsions, I., 2015. "The long-run determination of the real exchange rate. Evidence from an intertemporal modelling framework using the dollar-pound exchange rate," Working Papers 15/19, Department of Economics, City University London.
    6. Stephen G. Hall & Heather D. Gibson & G. S. Tavlas & Mike G. Tsionas, 2020. "A Monte Carlo Study of Time Varying Coefficient (TVC) Estimation," Computational Economics, Springer;Society for Computational Economics, vol. 56(1), pages 115-130, June.
    7. Robert Kelm, 2016. "Eksport, import i kurs złotego: 2000−2014," Bank i Kredyt, Narodowy Bank Polski, vol. 47(6), pages 585-620.
    8. Liu, Tie-Ying & Ma, Jun-Teng, 2024. "Exchange rate and inflation between China and the United States: A bootstrap rolling-window approach," Economic Systems, Elsevier, vol. 48(1).
    9. M. Ariff & A. Zarei, 2016. "Exchange Rate Behavior of Canada, Japan, the United Kingdom and the United States," Open Economies Review, Springer, vol. 27(2), pages 341-357, April.
    10. Maria Eleftheriou & Nikolas A. Müller-Plantenberg, 2018. "The Purchasing Power Parity Fallacy: Time to Reconsider the PPP Hypothesis," Open Economies Review, Springer, vol. 29(3), pages 481-515, July.
    11. Lal, Madan & Kumar, Satish & Pandey, Dharen Kumar & Rai, Varun Kumar & Lim, Weng Marc, 2023. "Exchange rate volatility and international trade," Journal of Business Research, Elsevier, vol. 167(C).
    12. Pilbeam, K. & Litsios, I., 2018. "Long-run determination of the nominal exchange rate in the presence of national debts: Evidence from the yen-dollar exchange rate," Working Papers 18/01, Department of Economics, City University London.
    13. Ariff, Mohamed & Zarei, Alireza & Bhatti, M. Ishaq, 2021. "Monitoring exchange rate instability in 12 selected Islamic economies," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    14. Mohamed Ariff & Alireza Zarei, 2018. "Sustainable Development and Currency Exchange Rate Behavior," Asian Economic Papers, MIT Press, vol. 17(3), pages 148-173, Fall.
    15. Ioannis Litsios & Keith Pilbeam, 2019. "The Role Of National Debts In The Determination Of The Yen‐Dollar Exchange Rate," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1182-1195, April.
    16. George Hondroyiannis & Dimitrios Papaoikonomou, 2018. "Fiscal structural reforms: the effect of card payments on vat revenue in the euro area," Working Papers 249, Bank of Greece.

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    More about this item

    Keywords

    Purchasing power parity; symmetry; proportionality; homogeneity; generalized cointegration; time-varying coefficients.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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