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A cointegration analysis of purchasing power parity: 1973–96
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This paper tests the purchasing power parity (PPP) hypothesis for five industrial countries using cointegration and error-correction
modeling. The cointegration test indicated that for all countries the PPP hypothesis holds in the long run but not in the
short run. Further, the errorcorrection models suggested that deviations of the actual exchange rate from its long-run PPP
value were corrected in subsequent periods. Finally, the high frequency monthly data models did a better job of tracking the
turning points of the actual data than the low-frequency quarterly and yearly models.
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... methodologies: (i) a reduced Vector Autoregression (VAR) to examine the response of the economies of the countries that want to form the currency union to external shocks from France, the UK and the USA, and (ii) co-integration analysis of the theory of Generalized Purchasing Power Parity (GPPP) to ascertain the existence of at least one co-integrating relationship between the real exchange rates of four currencies currently in the sub-region (CFA, Dalasi, Naira and Cedi). The study builds on and complements similar studies on West Africa such as Fielding and Shields (1999), Ricci (1997) and Ramirez and Khan (1999). ...
... With respect to the use of the theory of generalized purchasing power parities to explain real exchange rate behaviour in currency areas, Enders and Hurn (1994), Ramirez and Khan (1999), Enders (1995), Mkenda (2001) and Grandes (2003) agree that in the domain of a currency area, the real exchange rate should be stationary. All the same, Rose (2011) argue that it is empirically difficult to compare countries across exchange rates regimes, because it is usually hard to figure out what the regime of a country is in practice, since there are many conflicting regime classifications. ...
... Deriving from Enders' (1995) that the real exchange rates between two countries comprising the domain of an optimal currency area should be co-integrated, the paper also uses co-integration analysis on the theory of Generalized Purchasing Power Parity (GPPP) (Note 4) to determine whether a stable long-run relationship exists between the exchange rates of the four currencies (Note 5) of the countries and the corresponding consumer price indices. Countries qualifying to form a currency union must have their fundamental variables move together on average (see Mkenda (2001) and Ramirez and Khan (1999)). Fielding and Shields (1999) also argue that the cost of monetary union membership will depend on the extent to which price and output shocks are correlated across countries, and the degree of similarity in the long-run effects of the shocks on the macro-economy. ...
The successes, in the 1990s, of some established currency areas, such as the Euro and the CFA zones, re-awakened interest in their optimality as the inability of individual economies to compete in and maximally benefit from an increasingly globalized world was greatly acknowledged. This fact was not lost on the ECOWAS member countries that agreed to set up a currency union by 2020. However, the depth of the European sovereign debt crisis and its protracted duration are enough to raise concern in Abuja and other West African capitals as their self-imposed deadline for monetary integration looms. This paper tests the optimality of ECOWAS as a currency area by using two methodologies: a reduced VAR to examine the response of the economies to external price shocks from France, the UK and the US, and a co-integration analysis of the theory of Generalized Purchasing Power Parity (GPPP) to determine the existence of a co-integrating relationship between the exchange rates of four of the currencies that are currently in existence. The results of the study are mixed. The VAR model shows that external shocks from the three foreign countries do not affect all the members similarly. The effects of some of the shocks are statistically insignificant on more than half of the countries. However, the result of the cointegration analysis supports optimality as it identified at least one co-integrating equation and, in some cases, two.
... Some empirical studies have been done in some countries, but there has been no agreement on this matter. Most of the studies were conducted to support the hypothesis that PPP is valid for long-term (Pippenger 1993;Ramirez & Khan, 1999). While some other studies point to the contrary that the PPP hypothesis does not apply to long-run (Edison, 1987;Menezes & Resende, 1995). ...
... These results reinforce the study conducted by Pattinasarany (1997) for the case of Indonesia that there is no co-integration between the change in the exchange rate with the inflation rate in the consumer price index price level, other studies support the no co-integration in the long run is Hoque (1995), Edison (1997), Menezes & Resende (1995), Al-Zyoud (2015). And vice versa study Pippenger (1993) and Ramirez & Khan (1999) that the PPP hypothesis applies to long-term. Implicit termination of the PPP doctrine indicative barriers (protection) in international trade. ...
The goal of this study is to analyze the doctrine purchasing power parity (PPP) in Indonesia with the case study of the rupiah exchange rate to U.S. dollar. The autoregressive is used to estimate the relationship between the change of exchange rate and the difference Indonesia–USA inflation rate. The data used in this study are quarterly data obtained from the International Financial Statistics (IFS) and Bank Indonesia (BI) with the period 1997Q4-2013Q4. The exchange rate that used in this study is using the rate on rupiah to U S dollar. The price data used consumer price index in Indonesia and the United States with a base year of 2000. The results of this study show, that rupiah to the U.S. dollar is undervalued during the free floating exchange rate system and, the PPP doctrine to the case of the rupiah to the U.S. dollar is not valid in the period of this study.
... The test results for PPP by Cooper (1994), and by Ramirez and Khan (1999) are encouraging and provide empirical evidence for purchasing power parity in the long-run. Cooper (1994) in his paper found evidence that PPP does not hold in the long-run for Australian, New Zealand, and Singaporean currencies. ...
... Cointegration test did not support the existence of a long-run equilibrium relationship between the consumer price ratio and nominal exchange rate vis-à-vis the US dollar for any of the three countries. While Ramirez and Khan (1999) testes the validity of purchasing power parity for five industrial countries using cointegration and error-correction model and showed that all relevant variables were integrated of order I(1). They found that the diagnostic tests showed that purchasing power parity holds in the long-run.There are further empirical findings for PPP, for example, Tshipinare (2005) does not find any evidence to support purchasing power parity in the longrun between the Botswana and South African CPI's and exchange rate using the analysis of cointegtation. ...
This study tested the validity of the long-run purchasing power parity between Zambia and South Africa for the period 1997 to 2011. The study employed the following techniques unit root, cointegration, Granger-causality, impulse response and variance decomposition. The unit root tests showed that all relevant variables were integrated of order one. Cointegration test did support the existence of a long-run equilibrium relationship between the consumer price ratio and the nominal exchange rate for the two countries. The error correction model was constructed and the results provide evidence of some weak form of PPP holding in the long-run.
... Islam and Ahmed (1999), who analyzed the validity of PPP in Korea using the Johansen co-integration test, state that that PPP was valid according to the results they obtained from their research. Ramirez and Khan (1999) analyzed the PPP hypothesis employing the Johansen co-integration and VECM methods, using data for five developed countries. The Johansen co-integration test results showed that PPP was valid in all countries in the long term. ...
In this study the stationarity of monthly real exchange rate data for the “fragile five” countries which are among the emerging market economies, is analyzed for the period of 2003:01-2015:10, using traditional unit root tests and unit root tests with structural breaks. According to the results of traditional Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root test results, it has been determined that the real exchange rate series of the fragile five countries had a unit root and therefore the Purchasing Power Parity (PPP) hypothesis does not hold true in these countries. The results of a Zivot-Andrews unit root test, which allows for a single structural break, show that real exchange rate series were stationary for Brazil and India, and hence the PPP hypothesis is valid in these countries. According to the results of a Lee-Strazicich unit root test, which allows for two structural breaks, it has been concluded that the hypothesis is valid only for India. Likewise, using the Carrion-i- Sivestre (CS) unit root test, which allows for five structural breaks in the time series, it has been determined that only South Africa’s and India’s real exchange rate series are not stationary, and therefore the PPP hypothesis is not valid for these countries. In line with the results of the CS unit root test it can be claimed that, due to the fact that South African and Indian central banks are not under the pressure of establishing exchange rate stability, they have the possibility of implementing an independent monetary policy.
... By applying the Johansen et al. procedure, one is able to reject the null of no cointegration for all the countries, regardless of the base country, except the Philippines vis-à-vis Japan. Ramirez and Khan (1999) test the PPP hypothesis for five industrial countries using cointegration and error-correction modelling. The cointegration test indicated that for all countries the PPP hypothesis holds in the long run but not in the short run. ...
This article examines the validity of purchasing power parity (PPP) hypothesis using panel methods for
five founding members of the Association of Southeast Asian Nations (ASEAN) in US dollar and Japanese Yen. A range of heterogeneous panel unit root tests and panel cointegration analysis used in literature applied to test long run PPP for post Bretton Woods floating period (1980-2007). This study shows that a sequence of unit root tests does not favour mean reversion and found mixed result for Singapore. This outcome, however, might be due to generally limited power of conventional classical unit root test. Nevertheless, the PPP proposition seems to hold for post financial crises period (post-1997) in US and Japan as base country. Consequently, this study is broadly consistent with Baharumshah et al. (2007) results, invariant to numeraire currency, of mean reversion, mainly supporting PPP for Asian crises era. Furthermore, present study has used recent developed heterogeneous panelcointegration tests and found significant cointegration between nominal exchange rate, domestic and foreign prices. However, the results provide more evidence for ASEAN-5 in Japanese based in favour of cointegration in long run compared with US dollar is the numeraire currency.
Penelitian ini bertujuan untuk mengetahui Pengaruh Inflasi dan Jumlah Uang Beredar Terhadap Penentuan Suku Bunga Sertifikat Bank Indonesia (SBI). Dalam penelitian ini dianalisis mengenai pengaruh variabel-variabel ekonomi makro (Jumlah Uang Beredar dan Inflasi) terhadap penentuan kebijakan suku bunga SBI. Dengan didukung oleh beberapa teori tentang Suku Bunga, SBI, Jumlah Uang Beredar dan Inflasi, maka penelitian ini dapat dilakukan untuk melihat berbagai pengaruh variabel-variabel tersebut. Metode yang digunakan adalah analisis regresi linear berganda. Hasil penelitian yang diperoleh, variabel Inflasi dan Jumlah Uang Beredar berpengaruh positif terhadap suku bunga SBI, sementara itu pengujian hipotesis menunjukkan bahwa: 1) variable inflasi berpengaruh positif tidak signifikan. 2) variable jumlah uang beredar berpengaruh positif signifikan
This paper presents indirect evidence that absolute purchasing power parity (PPP) may hold in the long-run between Mexico and the U.S., but due to data limitations, the relationship could not be tested directly. Thus it is not clear if absolute PPP holds in the long run between the U.S. and Mexico. Given that relative PPP is a necessary, but not sufficient, condition for absolute PPP to hold, this study tests the relationship between the change in the log of the exchange rate, and the changes in the log of the U.S. producer price index (PPI) and the Mexican PPI. Here, the absence of relative PPP would indicate that absolute PPP could not hold. Given that all the relevant variables in first difference log are stationary, PPP in its relative form holds and OLS can be applied directly in a VAR model setting, viz., treating all variables initially as potentially endogenous. The estimates indicate one-way Granger causality from the percentage change in the exchange rate to the percentage change in the Mexican price level, which is not an implausible result for an emerging nation such as Mexico which imports a significant fraction of (dollar denominated) intermediate products and capital inputs.
During the past couple of decades, the purchasing power parity (PPP) hypothesis has received extensive attention from exchange rate researchers. The objective of the study is to analyze the validity of Purchasing Power parity (PPP) for the six Asian countries. For this purpose, the stationarity of nominal exchange rates has been studied using the different unit root tests like Augmented Dickey Fuller Test , Phillips Perron Test , Kwiatkowski, Phillips, Schmidt and Shin Test (KPSS) and also the results of these tests are compared. The ADF test results suggest deviations from PPP persist and that PPP is not valid in the six Asian countries. Phillips-Parron test suggests that except India and Taiwan, time series are non stationarity for four countries-Hong Kong, Japan, Korea, Singapore which signifies that purchasing power parity holds to be true for India and Taiwan only. The results of KPSS test on the nominal exchange rates show strong evidence of stationarity for all six countries: Hong Kong, India, Japan, Korea, Singapore, and Taiwan which suggests that PPP holds to be true in all six countries under our study. One co-integration relationship is found for India and Korea as reported by reported by LR test statistic. On the other hand, this co-integration approach fails to discover any co-integration relationship in the case of Hong Kong, Japan, Singapore, and Taiwan. This indicates that there exist steady long run co-integration between exchange rate and relative price index in case of India and Korea.
Let n observations Y 1, Y 2, ···, Y n be generated by the model Y t = pY t−1 + e t , where Y 0 is a fixed constant and {e t } t-1 n is a sequence of independent normal random variables with mean 0 and variance σ2. Properties of the regression estimator of p are obtained under the assumption that p = ±1. Representations for the limit distributions of the estimator of p and of the regression t test are derived. The estimator of p and the regression t test furnish methods of testing the hypothesis that p = 1.
Recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates. The 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century (since the Bretton Woods conference) into a regime of flexible (though managed) rates. As a consequence of the emergence of the new legal and economic system traders, national governments and international organisations were confronted with new economic problems, choices and instruments. During the 1970s ex-change rates fluctuated widely and inflation rates accelerated. The international monetary system had to accommodate extraordinarily large oil-related shocks which affected trade flows in goods and assets. Huge oil payments had to be recycled. Uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier. These developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets. They were associated with a large slide in the value of the US dollar, and resulted in speeding up the creation of new institutions like the European monetary system which provided the formal framework for the management of exchange rates among members.
This book describes and evaluates the literature on exchange rate economics. It provides a wide-ranging survey, with background on the history of international monetary regimes and the institutional characteristics of foreign exchange markets, an overview of the development of conceptual and empirical models of exchange rate behavior, and perspectives on the key issues that policymakers confront in deciding whether, and how, to try to stabilize exchange rates. The treatment of most topics is reasonably compact, with extensive references to the literature for those desiring to pursue individual topics further. The level of exposition is relatively easy to comprehend and the chapters are written at a level intelligible to first-year graduate students or advanced undergraduates. The book will enlighten both students and policymakers, and should also serve as a valuable reference for many research economists.
This paper examines some of the evidence on the relationship between prices and exchange rates, looking at data from the 1920s and the 1970s. Simple regression tests lead us to reject the hypothesis of purchasing power parity. These tests are, however, inappropriate when, as is usually the case, neither prices nor the exchange rate may be taken as exogenous. Tests which recognize the endogeneity of both prices and exchange rates give results considerably more favorable to purchasing power parity. Tests which recognize the endogeneity of both prices and exchange rates give results which, while not definitive, are more favorable to the purchasing power parity hypothesis.