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Purchasing Power Parity: Doctrinal Perspective and Evidence from the 1920s
Abstract
The first part of the paper traces the doctrinal origins of the purchasing power parity (PPP) doctrine and reviews the central issues of controversy. The second part is an empirical study covering the flexible exchange rates period of the 1920s. The empirical work examines the efficiency of foreign exchange markets, the absolute and the relative versions of PPP for alternative price indices, the homogeneity postulate, the relation between the short run and the long run, and the patterns of ‘causality’ between prices and exchange rates. The paper concludes with estimations of price equations and a discussion of the proper specification of PPP.
... Los trabajos de Frenkel (1976de Frenkel ( , 1978de Frenkel ( , 1981, Rogoff (1996), Devereux (1997), Sarno and Taylor (2002) and Chen and Devereux (2003) avalan la PPP en el largo plazo en economías desarrolla-en el largo plazo es la Paridad del Poder de Compra (PPP). Según lo citado por Frenkel (1978), los orígenes conceptuales de este modelo se sostienen en la Teoría Cuantitativa del Dinero en una economía abierta y cuyos principales precursores son Wheatley (1803Wheatley ( , 1807Wheatley ( , 1819 y Ricardo (1811, 1821). Mientras la ley del precio único se refiere a productos individuales, la PPP se refiere a todos los bienes en general. ...
... La evidencia internacional, basada principalmente en economías desarrolladas con similitudes en producción y precios, tiene un importante sesgo a corroborar dicha hipótesis. En esta línea, Frenkel (1978) también evalúa la expresión (5) y (6). Sus resultados muestran que la hipótesis de homogeneidad se cumple en todos los casos. ...
... Asimismo, Frenkel (1978) concluye que PPP podría fallar porque su marco teórico establece una relación de equilibrio entre dos variables endógenas. Así, Frenkel (1981) elabora un análisis sobre la libra esterlina, el franco francés y el marco alemán mediante estimaciones OLS e IVAR 3 . ...
This paper develops an analysis of the Purchasing Parity Power (PPP) in its relative way. In this approach to determine long-term exchange rates, the hypothesis of price homogeneity is used as a working assumption , that is β = β *. This means that levels of internal and external prices exert an equivalent effect on the exchange rate, therefore, when variations of the same magnitude in prices occur, exchange rates are not affected. Regarding the above, there is extensive literature that supports the PPP in the long term as indicated by.This literature is based mainly on developed economies with a high degree of similarity, in which price levels and composition of the consumption basket reach similar values. From a medium/long term approach, the market efficiency hypothesis implies that under PPP model, parameters are α = 0 and β = 1. The results of this work, based on the OLS estimator, show that the efficiency condition under PPP is rejected, even when evidence is significant for α = 0 and β = 1, the presence of first-order autocorrelation partially invalidates the relative PPP.
... Most of the early research did not get the result in favour of PPP except for the paper of Frenkel (1978), where proof in favour of PPP was found, but that study does not contemplate the chance of the regressors and residuals being non-stationary. Thus, the usual deductions of that study are not proper. ...
... Witnessing that PPP theory is the premise of the economic model for determining the exchange rate, Anorou, Habtu and Yusuf (2005), Dornbusch (1976), and Musa (1982) suggest that nonconformities from PPP arise essentially in the shortrun. The short-run nonconformities are upheld in researches mainly by Frenkel (1978). However, similar conclusions are not established in every case of finding the rationality of PPP theory in the long run. ...
Purpose: This study aims to empirically assess the rationality of Purchasing Power Parity (PPP) theory in Developing-8 (D-8) countries. For this purpose, the data of PPP, Consumer Price Index (CPI), and Wholesale Price Index (WPI) were used from 1990 to 2015, with annual frequency. Methodology: This paper attempted to set up the long-run association between the nominal exchange rate and relative prices as opposed to old investigations. This study applies the ADF, PP, and the recently developed KPSS test to test data stationarity, followed by a cointegration test, granger casualty test, and vector error correction model. Findings: Time-series properties of this study specify that the real exchange rates are stationary for sample countries, indicating PPP holds in these countries, whereas Cointegration results demonstrate that a strong cointegrating relationship exists among the variables of Bangladesh and Turkey only. Practical Implications: The findings of the study have some policy implications, which suggest some recommendations for bilateral trade among these countries. Originality: Findings of the paper suggest that the structure of these developing eight (D-8) countries tends to be less diverse, and fewer economic changes occur than in developed countries. Limitations: Findings of this paper can vary on a different set of databases depending on the changing pattern of CPI and WPI.
... In this paper, the exchange rate model was applied to explore the forcing factors that determine REER to the ASEAN-5 countries. However, Frenkel (1978), Edison (1985), Dibooglu and Enders (1995), Baharumshah and Mohd (1997), Salehizadeh and Taylor (1999), Goh Soo and Mithani (2000), Azali and Zubaidi (2001), Taylor (2002), Sarno and Taylor (2002), Baharumshah and Lim (2004), Chaboud and Wright (2005), and Che and Mansur (2006) found that many earlier empirical researchers on the exchange rate adopted co-integration techniques. ...
... Thus, the long run forcing variable of PPP should differ accordingly to countries' economic environments. The result are also similar to the empirical findings of Frenkel (1976Frenkel ( , 1978, MacDonald and Taylor (1994), Chinn and Meese (1995), Kanas (1997), Husted and MacDonald (1998), Dutt and Gosh (1999), Francis et al. (2001), Caporale, et al. (2001, Rapach and Wohar (2002), Groen and Kleibergen (2003), and Chaboud and Wright (2005). Thus, the policy makers in the respective ASEAN-5 economies need to constantly identify the long-run forcing variables. ...
... The PPP equation has been tested empirically, and Officer (1976), Isard (1976) andFrenkel (1978;1981), were some of the first notable studies. Isard (1976) and Officer (1976) did not find evidence in support of the PPP hypothesis. ...
... Isard (1976) and Officer (1976) did not find evidence in support of the PPP hypothesis. However, Frenkel (1978Frenkel ( , 1981 found evidence in favour of the PPP hypothesis. Breuer (1994) summarised some empirical studies on the PPP hypothesis and showed that many studies did not find evidence in support of the PPP hypothesis. ...
... An extensive number of studies have tested the PPP theory and many have concluded that, in the long-run, the PPP theory is supported, though it still remains a highly debated and unresolved topic, especially in former communist countries and transition economies (Froot & Rogoff, 1995 Authors whose studies did not find general evidence supporting purchasing power parity include, but not limited to Frenkel (1978), Darby (1980), Dornbusch (1980), Frenkel (1981), Adler & Lehman (1983), Junge (1985), Rush & Husted (1985), Edison (1985Edison ( , 1987 Nagayasu's (2021) analysis also failed to find support for purchasing power parity. According to Nagayasu's (2021), prices shocks, or price changes, are not simply transmitted through the exchange rate, and therefore purchasing power parity equilibrium does not occur. ...
... M. Taylor & Taylor, 2004). Some argues that PPP is valid for economies with high inflation (Frenkel, 1978) and does not hold in economies with low and moderate inflation (Frenkel, 1981). Recently, Papell and Prodan (2020) have also shown strong evidence of long-run PPP for high inflation countries. ...
Using regression and wavelet coherence techniques this paper tries to probe the validity of purchasing power parity (PPP) in Pakistan. For this purpose, monthly data is collected for nominal exchange rate and consumer prices of Pakistan and its 23 major trading partners for the flexible exchange rate period 1982M1 to 2020M12. The regression results show that in 12 countries inflation differential significantly positively affect exchange rate. Similarly, Granger causality results reveal that inflation differential causes exchange rates in 12 countries. Wavelet coherency results indicate that there is significant co-movements between inflation differentials and exchange rates in varying time and frequency domains in all countries. These results indicate the partial validity of PPP in Pakistan. These results suggest that by reducing its inflation Pakistan can stabilize its exchange rates.
JEL Classifications: C14, E31, F31
... Purchasing power is one of the practical indicators representing the economic condition of the masses of the country (Frenkel, 1978;Abuaf and Jorion, 1990;Rogoff, 1996;Taylor and Taylor, 2004), thus there is a strong relationship is existed between purchasing power and quality of life (Chin, 2001;Fisher, 2006;Tan et al., 2018). There are numerous studies (Costanza et al., 2007;Coletto et al., 2017;Greco and Polli, 2021) that highlighted that security perception has an important role in determining the level of human well-being. ...
This article has examined the role of environmental conditions and purchasing power parity in deciding the quality of life among big Asian cities. The study has constructed an index for quality of life with the help of housing, crime rates, death rate, average life expectancy, environmental degradation, and level of education. Quality of life has been selected as the dependent variable and the level of pollution, availability of health care facilities, local purchasing power, availability of groceries, level of democracy, cost of living, restaurants, level of traffic, and level of rents are selected explanatory variables. For empirical analysis, this study uses data for the years 2017, 2018, and 2019. The estimated results show that pollution has a negative and significant impact on the quality of life in the case of Asian cities. Local purchasing power has a positive and significant relationship with the quality of life in the cities of Asia. Groceries and democracy are very important parts of the daily life of human beings but they have insignificant impacts on the quality of life in Asian cities. Restaurants have a positive and significant impact on quality of life. This study finds that level of traffic and the level of rent have a negative and significant impact on the quality of life in the case of Asian cities. The overall results conclude that selected indicators play a significant role in determining the quality of life in Asian cities.
... Initially, researchers examined the unity's slope coefficient by regressing the exchange log on the relative prices. PPP was supported by evidence in hyperinflationary countries during the 1920s [6], but it was rejected by evidence in industrialized countries during the 1970s, according to [7]. These early studies were later called into question by the discovery of the nonstationarity of the exchange rate and prices, which invalidated early empirical approaches. ...
Purchasing power parity (PPP) is vital for determining exchange rates. It has been evaluated in a variety of ways, but the findings have been inconsistent. Traded products have been the focus of much investigation relating to PPP. When it comes to non-traded products and services, the PPP deviation is especially noticeable. Against this background, this study examines the PPP from 1999 to 2021 across 27 economies, using the Big Mac as an example of an alternative non-traded good. The data analysis is conducted using the panel unit root and panel cointegration approaches. Both approaches confirm the validity of weak-form PPP. While the evidence for weak-form PPP is robust, it is inconclusive for strong-form PPP. The findings provide market participants in foreign exchange markets with guidance for the future movements of exchange rates when making investment decisions.
... Analizler neticesinde her iki ülkede ilgili dönem için SAGP'nin geçerli olmadığı sonucuna varılmıştır. Frenkel (1978), ABD, Fransa ve İngiltere'de SAGP'nin geçerliliğini 1974-1978 dönemi için En Küçük Kareler (EKK) yöntemi ve nedensellik analizi ile incelemiştir. Çalışmada SAGP'nin geçerli olduğuna dair bulgulara rastlanılamamıştır. ...
Purchasing Power Parity (PPP) is one of the topics that has been studied with great interest in the economics and finance literature. PPP refers to the rate of change that equalizes the purchasing power of various currencies by eliminating the price level differences between countries. The validity of the PPP theory was tested using various methods in various countries or countries. In this study, it is aimed to examine whether the PPP hypothesis is valid in MIST (Mexico, Indonesia, South Korea and Turkey) countries for the period 1994:01-2022:01. For this purpose, panel unit root tests are used to analyze whether real exchange rates are stationary or not. Due to the cross-sectional dependency between the units, the second generation unit root tests PANKPSS developed by Carrion-i-Silvestre et al. (2005) and CADF developed by Pesaran (2007) tests are used in the study, which takes this dependency into account. While the findings obtained with the CADF test revealed that the series was not stationary and the PPP theory was not valid, the results of the PANKPSS test, which took into account the structural breaks, concluded that the series was stationary and the PPP theory was valid.
... 203). For earlier reviews of PPP theory, see, e.g., Cheung et al. (2004), Dornbusch (1980, 1988, Frenkel (1978), Froot and Rogoff (1995), Manzur (2008), O'Connell (1998), Officer (1982, Rogoff (1996) and Taylor and Taylor (2004). 5 It is difficult to find a commodity that might conform exactly to the LOP in its "strong", stark, unalloyed form, but gold, with its high value-to-weight ratio and lack of barriers to trade, might come close. ...
Are food prices more or less equalised across countries? In view of various barriers to trade (both naturally occurring and of a man-made nature) and currency gyrations, the answer would seem to be an unambiguous “No”, but we show this question is worthy of further investigation. In order for the law of one price (LOP) to hold, domestic prices must respond one-for-one to changes in world prices and exchange rates, but this is usually prevented by variations in mark-ups and/or trade barriers. We use data on producer prices from the Food and Agriculture Organization to test for the LOP. The results give surprising support to the LOP: Market wedges appear to be insufficiently important to prevent food prices equalising over the longer term. The law of one food price seems to hold, at least as a first approximation.
... Several theories seek to determine this rate as the theory of interest rate parity and the quantity theory of money. However, the theory of Purchasing Power Parity (PPP) remains the basic theory as it was introduced by Frenkel (1978), Dridi and Kugler (1995). PPP is a very important concept in international economic modeling; it is used for important goals and specific. ...
This study examines the long-run relationship between exchange rates and relative prices. We use a long memory techniques that allow for persistence of chock relationships across real exchange rate to examine the existence of weak-form and strong-form Purchasing Power Parity (PPP) between the Tunisian and five partner countries of Tunisia, namely, (Germany, the United States, France, Italy, the UK, Morocco and Libya. The empirical results obtained through the R/S, Modified R/S, GPH and ELW tests; make us consider the PPP as an event in the long run if significant short-term deviations from the PPP cannot exist. Therefore, the analysis of the fractional cointegration makes the deviations, regarding equilibrium, follow a slightly integrated process and therefore capture a much wider group of research parity or mean-reverting behavior.
... Absolute purchasing power parity means that the equilibrium exchange rate between currencies is equal to the ratio between the prices of different countries (Frenkel, 1978). It depends on price indices consisting of weighted averages of more than one commodity. ...
According to purchasing power parity (PPP), the nominal exchange rate between the two currencies should be equal to the ratio of the total price levels between the two countries. In other words, it is a simple theory that argues that countries' currencies will have the same purchasing value. In this study, 25 OECD countries is aimed to test the validity of the purchasing power parity hypothesis. The validity of the hypothesis was tested with the monthly data of 1980-Q1 2018-Q12 and Fourier KPSS unit root tests. As a result of the analysis, the validity of the purchasing power parity hypothesis was provided in Brazil,
... Absolute purchasing power parity means that the equilibrium exchange rate between currencies is equal to the ratio between the prices of different countries (Frenkel, 1978). It depends on price indices consisting of weighted averages of more than one commodity. ...
According to purchasing power parity (PPP), the nominal exchange rate between the two currencies should be equal to the ratio of the total price levels between the two countries. In other words, it is a simple theory that argues that countries' currencies will have the same purchasing value. In this study, 25 OECD countries is aimed to test the validity of the purchasing power parity hypothesis. The validity of the hypothesis was tested with the monthly data of 1980-Q1 2018-Q12 and Fourier KPSS unit root tests. As a result of the analysis, the validity of the purchasing power parity hypothesis was provided in Brazil, France, Italy, Sweden, Iceland, Ireland, Spain; It has been determined that the purchasing power parity hypothesis is not valid in the countries of Australia, Austria, Belgium, Canada, Germany, Japan, Malaysia, Mexico, Switzerland, USA, Chile, Colombia, Finland, Luxembourg, Netherlands, New Zealand, Norway, Portugal.
... Ancak diğer taraftan, entelektüel kökenlerine yönelik farklı yaklaşımlar bulunmaktadır. Dornbusch (1985), teorinin 16 Frenkel (1978) ise Wheatley ve Ricardo'nun çalışmalarına dayandığını ifade etmektedir. Genel geçerliliği konusunda literatürde çok fazla tartışma yer almasına rağmen, döviz kuru hareketlerinin arkasında yatan nedenleri açıklaması anlamında oldukça önemli bir yere sahip olduğu kabul edilmektedir (Krugman vd., 2018: 33). ...
Satınalma gücü paritesi, döviz kuru belirleme teorileri arasında en eski ve en tartışmalı yaklaşımlardan biridir. Bu çalışma, satınalma gücü paritesinin uzun dönemli geçerliliğini 36 OECD ülkesi için Fourier kantil birim kök testi ile incelenmeyi amaçlamaktadır. Analizler 1993:1-2018:8 aylık dönemleri kapsamaktadır. Fourier kantil birim kök testi sonuçları, 24 OECD ülkesi için satınalma gücü paritesinin geçerli olduğunu ortaya koymaktadır. Bu durum, söz konusu 24 OECD ülkesinde yer alan döviz kurlarının nispi fiyat değişikliklerine uyum sağladığını ve satınalma gücü paritesi teorisinin bu ülkeler için güvenilir bir döviz kuru belirleme aracı olarak kullanılabileceğini ifade etmektedir. Abstract Purchasing power parity is one of the oldest and most controversial approaches among theories of exchange rate determination. This study aims to analyze the long-run validity of purchasing power parity for 36 OECD countries using the Fourier quantile unit root test. Monthly observations are used from 1995:1 to 2018:12. Fourier quantile unit root test results show that purchasing power parity is valid for 24 OECD countries. This reveals that the exchange rates in these countries adapt to the price differences and therefore, purchasing power parity theory can be used as a reliable exchange rate determination policy for the countries.
... Dönem(ler) Yöntem(ler) Sonuç Frenkel (1978Frenkel ( ) 1921Frenkel ( :2-1925 (Aylık) EKK ve Nedensellik Analizi SGP, 3 gelişmiş ekonomi için geçerli değildir. Hakkio (1984Hakkio ( ) 1921Hakkio ( :1-1925Hakkio ( :4 1973Hakkio ( :3-1982 Zaman Serisi-Yatay Kesit Analizi SGP, 4 gelişmiş ekonomi için geçerlidir. ...
... For a recent review of LOP and its relation to PPP, see Marsh et al. (2012). For reviews of the PPP theory, see, among many others, Frenkel (1978), Dornbusch (1988), Rogoff (1996), Taylor and Taylor (2004) and Manzur (2008). 2 Productivity differences might be a result of more productive firms (which focus on producing tradables) crowding out less productive firms (Bergin et al., 2006). They could also, according to Buera et al. (2011), be a result of misallocation of productive resources due to financial frictions. ...
This study proposes a new measure of the tradability of 120+ commodities based on price dispersion. This approach is used to construct price indices of tradables and non-tradables for 150+ countries. The expenditure share of tradables is lower for richer countries, while the relative price of non-tradables, which plays an important role in the determination of real exchange rates, is higher. Secondly, a common-factor approach (based on principal components) is introduced to compress the large volume of information on prices and quantities consumed globally. We find that cross-commodity correlations are higher for prices than for consumption. In addition, income is responsible for 98% of the variation in the first principal component of consumption but explains only 24% of the first price component. This suggests consumption are driven primarily by domestic factors, while prices are determined by factors outside the country, along the lines of the Purchasing Power Parity theory.
... Similar to the tests carried out in the previous subchapter, most studies suggested rejecting the dependence imposed by the PPP in its exact form. The exception, however, is the work of Frenkel (1978), in which he presented completely different empirical results. He estimated the model of purchasing power parity in a form which was very similar to the previously discussed relative version, with the exception that he assumed a priori an equal impact of prices on the nominal exchange rate. ...
... A massive amount of empirical work has been conducted on conventional PPP for developed and developing countries operating under both fixed and flexible exchange rates. The majority of earlier work (see, inter alia, Taylor 1988;MacDonald 1988;Frenkel 1981Frenkel , 1978Corbae and Ouliaris 1988;Baillie and Selover 1987) investigating the validity of conventional PPP over the current float document evidence that usually indicates the failure of conventional PPP. 17 In his seminal work using regression analysis, Frenkel (1981) was the first to proclaim the collapse of PPP over the current float. He attributes the PPP collapse to the U.S. dollar phenomenon and dominance of real shocks over monetary shocks. ...
Price convergence and goods market integration are examined between GCC countries and the U.S. by testing the long-run relationship between domestic and exchange rate adjusted foreign prices, as embedded in conventional and ex-ante PPP. The results of cointegration tests confirm the invalidity of conventional PPP in the long run, and the implication that the real exchange rate should be stationary over time is also rejected when tested using a battery of linear and nonlinear tests. In contrast, not only are cointegration tests supportive of ex-ante PPP in all cases but they also do not reject the restrictions it involves.
... Extensive studies have shown that the relationship between the local and foreign inflation rates and the changes in the exchange rate holds in the long run, but not in the short run. See for example Frenkel (1978) and Rogalski & Vinso (1977). 9. ...
The en-masse bankruptcies of many corporations in high inflation countries in recent years is attributed partially to the pre-recession high-risk financial planning. This paper elaborates on the type of considerations which govern the financial decisions of local firms in an inflationary environment and shows that the real cost of borrowing, even index-linked or hard currency funds may be very low and even negative. This might happen due to common tax laws. This phenomenon lead many business firms to prefer debt over equity financing. The analysis indicates the kind of risk assessment which South African firms might have to conduct when they formulate their credit and financial policies in a high-inflation environment.
... In the modern theories that are classified two monetarist approach and PBA, exchange rate determination has been established on the principles including full and free flow of capital and rational expectations. In monetarist theory, theorists such as Dornbusch (1976), Frenkel (1978), Mundell (1963), Fleming (1962) and Gartner (1993) presented the overshooting model, monetarist model, equilibrium model and exchange rate bubble model (Hoontrakul, 1999). In PBA also the personality such as Gartner (1993) and Kory (1976) have been theorized. ...
In this study, the effect of exchange rate and its volatilities on employment by industry sector in Iran has been investigated. For this purpose, we have used time series data (1979-2012) and GARCH method. The results showed that appreciation in the unofficial exchange rate will lead to increase in employment by industry sector. This reflects the fact that exchange rate appreciation has increased the demand for domestic production. Therefore, it has a positive effect on output and employment. Also, the effect of exchange rate volatilities on employment by industry sector in Iran is negative and significant. It shows that with the volatility of exchange rate, due to uncertainty about the future, export is limited. As a result, it has a negative effect on output and employment.
... In the modern theories that are classified two monetarist approach and PBA, exchange rate determination has been established on the principles including full and free flow of capital and rational expectations. In monetarist theory, theorists such as Dornbusch (1976), Frenkel (1978, Mundell (1963), Fleming (1962) and Gartner (1993) presented the overshooting model, monetarist model, equilibrium model and exchange rate bubble model (Hoontrakul, 1999). In PBA also the personality such as Gartner (1993) and Kory (1976) have been theorized. ...
In this study, the effect of exchange rate and its volatilities on employment by industry sector in Iran has been investigated. For this purpose, we have used time series data (1979-2012) and GARCH method. The results showed that appreciation in the unofficial exchange rate will lead to increase in employment by industry sector. This reflects the fact that exchange rate appreciation has increased the demand for domestic production. Therefore, it has a positive effect on output and employment. Also, the effect of exchange rate volatilities on employment by industry sector in Iran is negative and significant. It shows that with the volatility of exchange rate, due to uncertainty about the future, export is limited. As a result, it has a negative effect on output and employment.
... In the modern theories that are classified two monetarist approach and PBA, exchange rate determination has been established on the principles including full and free flow of capital and rational expectations. In monetarist theory, theorists such as Dornbusch (1976), Frenkel (1978), Mundell (1963), Fleming (1962) and Gartner (1993) presented the overshooting model, monetarist model, equilibrium model and exchange rate bubble model (Hoontrakul, 1999). In PBA also the personality such as Gartner (1993) and Kory (1976) have been theorized. ...
In this study, the effect of exchange rate and its volatilities on employment by industry sector in Iran has been investigated. For this purpose, we have used time series data (1979-2012) and GARCH method. The results showed that appreciation in the unofficial exchange rate will lead to increase in employment by industry sector. This reflects the fact that exchange rate appreciation has increased the demand for domestic production. Therefore, it has a positive effect on output and employment. Also, the effect of exchange rate volatilities on employment by industry sector in Iran is negative and significant. It shows that with the volatility of exchange rate, due to uncertainty about the future, export is limited. As a result, it has a negative effect on output and employment.
... In the modern theories that are classified two monetarist approach and PBA, exchange rate determination has been established on the principles including full and free flow of capital and rational expectations. In monetarist theory, theorists such as Dornbusch (1976), Frenkel (1978), Mundell (1963), Fleming (1962) and Gartner (1993) presented the overshooting model, monetarist model, equilibrium model and exchange rate bubble model (Hoontrakul, 1999). In PBA also the personality such as Gartner (1993) and Kory (1976) have been theorized. ...
... This work can be divided into seven main groups. 3 First, a number of studies carried out, inter alia, by Frenkel (1978), Krugman (1978), Ardeni and Lubian (1989) and Taylor (1992) examined the validity of the PPP hypothesis and found supportive evidence for almost all exchange rates except for those involving the US-dollar. Second, studies by Taylor (1988), Giovannetti (1989), Patel (1990), Nachane andChrissanthaki (1991), Crowder (1992), Sarantis and Stewart (1993), MacDonald (1993), Cooper (1994, Corbae and Ovliaris (1988), Arderi and Lubin (1991), Dornbusch (1988) and Moosa and Bhatti (1996) investigated the validity of PPP theory for the post-Bretton Woods floating exchange rates system and failed to produce supportive evidence for long-run PPP. 4 Third, studies conducted by McNown and Wallace (1989), Liu (1992) and Mahadavi and Zhou (1994) found supportive evidence for countries experiencing hyperinflation. ...
The main focus of this paper is to measure the speed of adjustment of the exchange rate by means of the persistent profile approach developed by Pesaran and Shin (1996) to examine the symmetry and proportionality assumptions of the purchasing power parity (PPP) theory of exchange rates for the Pak-rupee vis-à-vis the US-dollar exchange rate over the period 1982Q2-2005Q4. Using cointegration and vector error-correction modeling approaches, we find considerable support for the validity of weak-form PPP in Pakistan. Furthermore, the symmetry and proportionality assumptions of PPP are not verified. In the short-run, the exchange rate and foreign prices play a significant role in the convergence process to achieve long-run equilibrium. However, the speed of adjustment is very slow and the persistence profiles suggest that almost 4-5 years are required to eliminate deviations and bring the nominal exchange rate in line with the long-run equilibrium path.
... Az egyedi termékek áraira vonatkozó területi eltérésekrıl több információval rendelkezünk. 8 Ilyen "tesztelésre" néhány példát lásd: Crownover-Pippenger-Steigerwald (1996), Feensrta-Kendall (1997), Frankel-Rose (1996), Frenkel (1978), Johansen-Juselius (1992), O'Connell (1998), Oh (1996), Ott (1996), Papell (1997), Pippenger (1993) stb. Elenyészıen kevés a vásárlóerıparitás elmélet elvi hibáival, elvi tarthatatlanságával foglalkozó munkák száma. ...
A gazdasági elemzések térszemléletének egyes kérdései A területi gazdasági kérdések elméleti tárgyalásakor minden kutatásra jellemzı lesz valamilyen explicit vagy implicit térszemlélet. A területi gazdasági kérdésekkel direkt módon foglalkozó kutatók elemzéseiket gyakran kezdik a térnélküli kutatások kritikájával, magának az alkalmazott térszemléletnek a térelméleti megalapozottságáról, vagy egyszerőbben csak az elméleti tér és a tényleges, konkrét földrajzi tér közötti kapcsolat megteremtésének problémáiról azonban kevesebbet olvashatunk. Ez a helyzet azért is súlyos hiányosságnak tekinthetı, mivel amennyire elfogadható az az általános bírálat, hogy bizonyos térnélküli elméletek a területiség bekapcsolásával alkalmazhatatlanokká és téves következtetésekhez vezetıkké válnak, ugyannyira jogos annak felvetése, hogy a vizsgálat szempontjából inadekvát, nem megfelelı térszemléletben megfogalmazott elméletek nem adhatják keretét a területi gazdasági kérdések tárgyalásának. Tanulmányom elıször a gazdasági tér folytonosságát figyelembe nem vevı, az egypontgazdaságok hálózataként értelmezett térfelfogás okait tekintem át, mivel valamennyi regionális gazdaságelméleti probléma gyökere erre a térelméletileg hibás megközelítésre vezethetı vissza. Ezután az egypontgazdaságok hálózataként felfogott tér néhány elméleti következményét mutatom be. A régiók tipizálásáról A regionális egységek tipizálásakor a gazdasági elemzések során is leggyakrabban a következı három típust különböztetik meg: homogén vagy egyforma régiók; a határvonalak meghúzásánál a régiók közötti különbségek és a régión belüli különbségek hányadosának a maximalizálása a cél; funkcionális vagy nodális régiók; a határvonalak meghúzásánál a régión belüli áramlások és a régiók közötti áramlások hányadosának maximalizálása a cél; tervezési vagy program régiók; a határvonalak meghúzása a szervezési és adminisztrációs céloknak megfelelı ad hoc szempontokon nyugszik (Haggett, 1987, 451-453. o.). A funkcionális régiót csomóponti régiónak is nevezik, egyes osztályozási rendszerek pedig a tervezési vagy program régiók helyett politikai, közigazgatási, statisztikai, adminisztratív célú vagy hasonló nagyságú régiókról beszélnek, nagyjából hasonló tartalom mellett (Lengyel, 2000; Lengyel-Rechnitzer, 2004; Noronha-Goodchild, 1992). A homogén régióknál teljes mértékben, a tervezési régióknál pedig bizonyos típusaival kapcsolatban egyértelmő követelményként jelenik meg az átfedésmentesség, vagyis hogy egy térszerkezeti egység egy és csakis egy régióhoz tartozhat. A funkcionális régiók kapcsán ugyanakkor két, egymástól gyökeresen eltérı szemléletet lehet megkülönböztetni. Az egyik megközelítés szerint az ilyen régióknak nincsenek szilárd határaik, hanem a gazdasági-társadalmi élet pontszerő sőrősödései és a közöttük lévı áramlások, kapcsolatok állandóan változó hálózatáról és így egymásba folytonosan átcsúszó hatáskörzetekrıl lehet beszélni. A munkaerıpiac, a felsıoktatás, a különbözı piaci szolgáltatások iránti kereslet vonzáskörzetei nem egymástól éles határvonalakkal elváló régiókból állnak. Egy munkakeresésnél, autóvásárlásnál, egyetemi jelentkezésnél nincs senki számára sem elıírva, hogy csak a "lakóhely szerint illetékes körzet" keretein belüli kínálatot vegye csak tekintetbe. 2 1 Dusek Tamás, PhD, Széchenyi István Egyetem Statisztika Tanszék 22 A kérdésrıl részletesebben lásd A területi elemzések alapjai (Dusek, 2004) A térfelosztás címő fejezetét, 63-92. o.
This article attempts to test the existence of purchasing power parity between Morocco and the European Union. To do this, we have used two types of tests to confirm this hypothesis. The methodology used is based on a set of empirical studies, including Johansen cointegration tests and unit root tests. The results of our study show that the unit root test rejects the hypothesis of the existence of purchasing power parity between Morocco and the European Union. However, for the cointegration test, the criteria for selecting the number of lags influenced the results. If the choice of the number of delays is based on the AIC and BIC information criteria, the validity of the purchasing power parity is rejected. On the other hand, if the choice of the number of delays is based on the HQ criterion, purchasing power parity is validated, which contradicts the conclusion of the first approach. Key Words: Exchange rate, purchasing power, purchasing power parity, consumer price index, unit root tests, Johansen cointegration tests RESUMÉ Le présent article tente de tester l'existence d'une parité de pouvoir d'achat entre le Maroc et l'Union européenne. Pour ce faire, nous avons utilisé deux types de tests pour confirmer cette hypothèse. La méthodologie utilisée est basée sur un ensemble d'études empiriques, notamment les tests de cointégration de Johansen et les tests de racine unitaire. 112 Les résultats de notre étude montrent que le test de racine unitaire rejette l'hypothèse de l'existence de la parité de pouvoir d'achat entre le Maroc et l'Union européenne. Par contre, pour le test de cointégration, le critère de sélection du nombre de retards a influencé les résultats. Si le choix du nombre de retards est basé sur les critères d'information AIC et BIC, la validité de la parité de pouvoir d'achat est rejetée. En revanche, si le choix du nombre de retards est basé sur le critère HQ, la parité de pouvoir d'achat est validée, ce qui contredit la conclusion de la première approche. Mot clefs: Taux de change, pouvoir d'achat, parité de pouvoir d'achat, indice des prix à la consommation, tests de racine unitaire, tests de cointégration de Johansen
In this paper I analyze the work on exchange rates and external imbalances by University of Chicago faculty members during the university’s first 100 years, 1892 to 1992. Many people associate Chicago’s views with Milton Friedman’s advocacy for flexible exchange rates. But, of course, there was much more than that, including the work of J. Laurence Laughlin on bimetallism, Jacob Viner on the balance of payments, Lloyd Metzler on transfers, Harry Johnson on trade and currencies, Lloyd Mints on exchange rate regimes, Robert Mundell on optimal currency areas, and Arnold Harberger on shadow exchange rates, among others. The analysis shows that, although different scholars emphasized different issues, there was a common thread in this research, anchored on the role of relative prices’ changes during the adjustment process.
This paper introduces a newly developed unit root test procedure named the Fourier Quantile AESTAR (FAESTAR-QKS) test that allows nonlinearity and structural changes. The FAESTAR-QKS unit root test is mainly based on the quantile approach and provides more powerful results since it is robust toward non-normal errors. Then, we test the Purchasing Power Parity hypothesis (PPP) [or the mean-reverting properties of real exchange rates] in emerging seven (E7) countries (Brazil, China, India, Indonesia, Mexico, Russia, and Turkey) from 1995:1 to 2023:6 by using a novel FAESTAR-QKS test procedure. The results show that the FAESTAR-QKS unit root test provides more evidence on the validity of PPP than the traditional unit root test. Accordingly, the PPP hypothesis is valid in all E7 countries except for Turkey in the long run.
This article evaluates recent exchange rates models and forecasting techniques on South African exchange rate data on a monthly basis over two decades, both using ex post and ex ante forecasts. Techniques considered include stochastic time series analysis, multiple regression and time-varying parameter regression. It is shown that forecasts from the Frenkel-Bilson, Bilson, Frenkel and Frankel model specifications are more accurate than those of the Dornbusch-Frankel, Hodrick and Hoffman and Schlagenhauf models. It is further demonstrated that variable parameter techniques outperform the rest in accuracy.
The study of international economic relations is at the heart of modern economics. Its aim is to examine the economic interactions between sovereign states.
Each country has the freedom to choose the goals and tools of its economic policy. This policy is made up of a set of consistent decisions made by the government, using various instruments, to achieve objectives related to the nation's balance. These objectives are both economic and social in nature.
Considering the context of Algeria's trade openness, this study aims to analyze the behavior of the Algerian dinar's real exchange rate and examine its misalignment with macroeconomic fundamentals.
We have chosen the BEER behavioral approach and the IMF CGER method for the REER to apply an error correction model that is based on the cointegration of the real effective exchange rate index and a group of Algerian economic fundamentals.
The analysis of the empirical results shows that the Algerian REER is partially misaligned from equilibrium. The results show significant fluctuations and a tendency to be somewhat distant from its medium-term equilibrium.
This chapter reviews the contributions of Chicago economists to the field of international economics. We discuss the early research of Jacob Viner in the 1930s, but focus primarily on the “golden era” of the 1960s. At that time, Harry Johnson, Robert Mundell, Arnold Harberger, and others made important contributions to the theory of commercial policy, exchange rates, and open economy macroeconomics.KeywordsCommercial policyexchange ratespurchasing power paritymonetary approach to the balance of paymentseffective rates of protectionflexible exchange ratesJacob VinerHarry JohnsonRobert MundellArnold Harberger
Purchasing power parity (PPP) is given a sympathetic and expansive treatment from the standpoint of economic history. While only relative PPP is discussed, for lack of data on the absolute version in these early times, PPP is interpreted broadly in “augmented” form to include variables beyond exchange rate and price indexes. A wide range of techniques for testing and applying PPP is outlined and accepted. Periods examined range from the Roman Empire to the 1930s. In sum, PPP provides a perspective that enriches our understanding of the relationship between exchange rates and commodity prices over the vast expanse of human history.KeywordsPurchasing power parityCausalityStationarityCointegrationPrice variableTesting PPPFloating ratesMetallic standardsGold standardExchange rate
This study proposes a new measure of the tradability of 120+ commodities based on price dispersion. This approach is used to construct price indices of tradables and non-tradables for 150+ countries. The expenditure share of tradables is lower for richer countries, while the relative price of non-tradables, which plays an important role in the determination of real exchange rates, is higher. Secondly, a common-factor approach (based on principal components) is introduced to compress the large volume of information on prices and quantities consumed globally. We find that cross-commodity correlations are higher for prices than for consumption. In addition, income is responsible for most of the variation in the first principal component of consumption but explains less of the first price component. This suggests consumption are driven primarily by domestic factors, while prices are determined by factors outside the country, along the lines of the Purchasing Power Parity theory.
Among all the important targets that a country wants to realize from an economic perspective, i.e. reducing current account deficit, reduction in the inflation soaring, struggle with unemployment, reduction in the debt burden of the public/fiscal deficit. The main target which underlying all these desires is economic stability. For economic stability, the exchange rate plays an important role, due to little fluctuation in exchange rates, exports, imports, domestic interest rates, debts and employment level gets affected. The primary objective of this study is to empirically examine the long-run relationship between the relative productivity differential (Tradable and Non-tradable goods sector) and Real exchange rate movements with the help of the Balassa-Samuelson (BS) effect. This study uses industry-wise disaggregation provided by KLEMS database to investigate whether the more segregations of industries into non-tradable and tradable goods sector matters for real exchange rate movements across countries. This study uses two groups, BRICS countries and the Indian economy for the period of 1991-2018 and 1981-2018 respectively. With the help of panel cointegration tests proposed by Pedroni and Kao, this paper examined the long run association between the real exchange rate and productivity differential. Contrary to the findings of available in the literature, the study does not find any evidence of BS effect for BRICS nations, but finds the evidence of BS effect for India.
This paper examines empirical tests of purchasing power parity theory (PPP) from a methodological perspective. In particular the issue of whether economists have seriously attempted to falsify the theory is addressed. While the results of econometric tests have been largely negative, this has not led to the falsification of PPP or its rejection by economists. The main reason for this is that economists have in practice adopted a methodology resembling the older inexact method a priori, revived recently by Hausman. The intensive econometric work into PPP may thus be construed as the attempt to find satisfactory empirical models of the theory or testing for the limitations and range of application of the underlying theory, rather than seriously testing the theory with a view to falsification. The nature and extent of the progress made in this field is also questioned.
This study aims to determine the validity of the absolute purchasing power parity between the Turkish lira and the British pound for March 2001-November 2020. Traditional unit root tests (and stationarity test) that do not take structural breaks into account and unit root tests that take structural breaks into account were used in the study. According to the results of all tests, it was found that the absolute purchasing power parity between the Turkish lira and the British pound was not valid.
We test for mean reversion in real exchange rates using data from five countries, four of which have experienced episodes of high inflation. Using monthly data for Argentina, Brazil, Chile, Colombia, and Israel, we find that a stochastic unit root model is typically appropriate (Brazil is the exception). Kalman filter estimates of the stochastic unit roots show sharp deviations from unity associated with high inflation episodes. This suggests that stochastic unit root models are a more appropriate way to model mean reversion in real exchange rates for high inflation countries than models with fixed rates of mean reversion.
The purchasing power parity (PPP) is generally accepted as the exchange rate projection between two countries relative to their inflation rate. However, despites many researches in the past years, the answer to whether the PPP holds, remains an on-going debate. The prior researches are criticized for their heavy reliance on the bilateral exchange rate which consists of short time-series or uses multilateral or real effective exchange rate (REER) constructed by the fixed trade weight. Finally, the implementing of only the most popular unit-root or stationary tests such as ADF and PP deems to diagnose with certain weaknesses, for instance, size distortion ascending from the heteroscedasticity. The main purpose of this study, therefore, is to study whether the PPP holds in Cambodia? In this paper, an alternative stationary test known as the KPSS test is incorporated with the stationary test thereof. Avoiding the aforementioned problem, the time-varying trade weights of Cambodia from 1995 to 2019 is employed to construct the total data points or months of 295 REER from January 1995 to July 2019 instead. The result indicates that the PPP theory holds in Cambodia based on the result generated by the ADF test modeled with constant and trend. The test result thereof also indicates that the REER of Cambodia has a mean reverting process.Keywords: Purchasing Power Parity, Real Effective Exchange Rate, Time-Varying Trade Weights, Unit Root TestJEL Classifications: F31, F41, C23DOI: https://doi.org/10.32479/ijefi.10543
Published Since the introduction of asymmetric cointegration and error-correction modeling, old theories have been getting a renewed attention, and purchasing power parity theory (PPP) is no exception. In this paper, we revisit the PPP by applying this relatively new technique. When we applied the symmetric cointegration test of Pesaran et al. [Pesaran, MH, Y Shin and RJ Smith (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326], we found cointegration between the nominal exchange rate and relative prices in 22 out of 82 countries. However, application of the asymmetric cointegration method of Shin et al. [Shin, Y, B Yu and M Greenwood-Nimmo (2014). Modelling asymmetric cointegration and dynamic multipliers in a non-linear ARDL framework. In R. Sickels and W. Horrace (eds.), Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications, pp. 281-314. New York: Springer] increased the number to 51 out of 82 countries. Nonlinear adjustment of relative prices was said to be the main contributing factor.
Perú es una economía pequeña y abierta al mundo dependiente en gran medida de las transacciones con sus socios comerciales que la exponen a shocks externos como la crisis financiera del año 2008 o el shock de tasas de interés de 2006 que afectaron directamente el comportamiento del tipo de cambio. Por tanto, el objetivo de la presente investigación fue contrastar la validez de la paridad del poder de compra entre Perú y Estados Unidos en el período 2000-2019, a partir de las formas funcionales de la ecuación de paridad en sus formas absoluta y relativa. Para el análisis de contraste de relaciones de cointegración se empleó la metodología de Johansen; para el cálculo de los parámetros de largo plazo, la estimación de modelos de vectores autorregresivos. Los resultados revelan que no se cumple la hipótesis de la paridad del poder de compra para el sol peruano ni para el dólar estadounidense en ninguna de sus formas funcionales planteadas. Esto se debe a que los parámetros estimados para la paridad absoluta y para la relativa son diferentes de la unidad, lo que rechaza así la hipótesis de eficiencia de mercados en el largo plazo tanto para el Perú como para Estados Unidos.
The idea of PPP can be traced back to the medieval times, though the theory is more formally contributed to Cassel (1918, 1922), developed during a period that endured noticeable inflation in the world for the first time and the inflation rate as well varied noticeably between major trading nations. Therefore, PPP has been associated with inflation and inflation differentials from the start, being thrust in to a theory by real world issues. Cassel (1918) states that “The rate of exchange between two countries is primarily determined by the quotient between the internal purchasing power against goods of the money of each country.”, and remarks that “The general inflation which has taken place during the war has lowered this purchasing power in all countries, though in a very different degree, and the rates of exchanges should accordingly be expected to deviate from their old parity in proportion to the inflation of each country.” A testimony is then reached: “At every moment the real parity between two countries is represented by this quotient between the purchasing power of the money in the one country and the other. I propose to call this parity ‘the purchasing power parity’.”
1990’larda ekonomistlerin taşıdığı inanış “satınalma gücü paritesi sadece uzun dönemde geçerli olan bir teoridir” şeklindeydi. Bu görüş uluslararası iktisat literatürün önemli bir teorisi olan satınalma gücü paritesine olan ilgiyi belirli ölçüde azalttı. Ancak son bir kaç yılda yapılan araştırmalar ve yayınlar satınalma gücü paritesinin kısa dönemde de geçerli olabileceğini (en azından gelişmiş ülkelerde) 1973 ’ten beri uygulamada olan dalgalı kur rejimi için göstermektedir. Bu sonuca değişik bir döneme uygulayarak genelleştirmek mümkün olabilir mi? Bu çalışma yeni geliştirilmiş tekdeğişimli verimli birim kök testleri kullanarak satınalma gücü paritesinin gerçek bir dalgalı kar rejimi olan 1920’lerde ve daha kısa bir dönem için doğruluğunu göstermektedir.
The paper empirically examines the validity of purchasing power parity (PPP) in Pakistan. For this purpose, unit root properties of real exchange rates (RERs) of Pakistan against its 21 major trading partners are examined using Fourier ADF (FADF) and Fourier KPSS (FKPSS) unit root tests for the period 1983Q1 to 2014Q4. Fourier unit root tests are used as they consider multiple temporary structural breaks and nonlinearity of the data. FADF test rejects the null hypothesis of unit root (non-stationary) in three RER series, while FKPSS test rejects the null hypothesis of stationary in nine RER series. Thus, FADF unit root test provide support for PPP hypothesis in three exchange rate series, while FKPSS test validates PPP theory in 12 exchange rate series. For robustness analysis, PPP equation is also estimated using regression analysis. The regression results show that PPP hypothesis is valid for nine exchange rate series. These findings suggest that PPP hypothesis partially holds in Pakistan.
We model market integration in the Middle East and Africa by analyzing price dispersion and testing the law of one price (LOP) on highly-comparable actual local retail prices of 135 goods and services across 23 countries in the region over the period of 1990–2016. Second-generation panel estimators are applied to four price benchmarks: Regional average, South Africa, China, and US prices. Cross-regional price dispersion diminishes considerably over time up to 2008, particularly for non-tradeables around China price. The test of LOP indicates the percentage of convergent prices is highest in China price benchmark, followed by US, South Africa, and regional average benchmarks. Direct estimation of the convergence speed confirms this order. Overall, the results show evidence of increasing market integration in Middle East and Africa but it appears to be driven by global forces and, especially, the rise of China as a new economic power. The results show that some emerging market economies, such as China, can step up and promote integration while traditional economic powerhouses, such as the USA and UK, disengage from international economic relations.
Are food prices more or less equalised across countries? In view of obvious barriers to trade (both naturally occurring and of a man-made nature) and currency gyrations, the answer would seem to be an unambiguous "No", but we show this question is worthy of further investigation. In order for the law of one price (LOP) to hold, domestic prices must respond one-for-one to changes in world prices and exchange rates, but this is usually prevented by variations in markups and/or trade barriers. We use data on consumer prices from the International Comparison Program and producer prices from the Food and Agriculture Organisation to test for the LOP for food. While not completely conclusive, these tests show the various market wedges appear to be insufficiently important to prevent food prices to equalise over the longer term.
This dissertation proposes an arbitrage cost band hypothesis to deepen the understanding of the anomaly of the nominal exchange rate and elucidates its implications in practice. The primary assumption of this arbitrage cost band hypothesis is that non-zero and unavoidable arbitrage costs in practice tend to cause a non-profitable price gap for arbitraging across international markets.
It is this non-profitable price gap that invalidates the purchasing power parity (PPP) in international goods and services markets, the uncovered interest rate parity (UIP) in international capital markets, and the covered interest rate parity (CIP) in the foreign exchange markets, hence, disconnects the short-term volatility of the nominal exchange rate from the macro-economic fundamentals. Also, it is probably this non-profitable price gap that induces the purchasing power parity (PPP) puzzle, the uncovered interest rate parity (UIP) puzzle, and the exchange-rate disconnect puzzle.
Therefore, this dissertation is composed of three chapters. The first chapter focuses on the arbitrage cost in the international goods and services market and attempts to calculate a least non-profitable exchange rate band with bilateral international trade data. The second chapter begins with an empirical failure of the UIP and demonstrates a possible existence of the open policy trinity of monetary independence, a fixed exchange rate regime and an open capital market in both theory and practice. The third chapter illustrates that non-fundamental (purecurrency) traders may dominate the currency trading, influence the primary fluctuation of the exchange rate, and disconnect the exchange rate from the fundamentals in the foreign exchange market.
In short, the arbitrage cost band hypothesis assumes that arbitrage costs hinder arbitraging and leave a non-profitable price gap across international markets. The non-profitable price gaps across international goods and services markets and capital markets are reflected as a nonprofitable exchange rate band in the foreign exchange market. Within the non-profitable exchange rate band, the nominal exchange rate is mainly driven by the behaviour of nonfundamental (pure-currency) traders and nearly follows a random walk. Hence, the results of this dissertation suggest that the non-zero arbitrage costs might be the key to understanding the puzzling behaviour of the nominal exchange rate.
Recent events associated with the international monetary system have raised serious questions about the viability in the 1970's of the quasi-fixed exchange rate mechanism established at Bretton Woods nearly thirty years ago. The U.S. suspension in 1971 of the convertibility of the dollar into gold and subsequent events have made obvious the need for fundamental reform of the system. Prominent among proposed changes is a movement in the direction of increased exchange rate flexibility.
The same rule which regulates the relative value of commodities in one country does not regulate the relative value of the commodities exchanged between two or more countries.
Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labor most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilised world. It is this principle which determines that wine shall be made in France and Portugal, that corn sell be grown in America and Poland, and that hardware and other goods shall be manufactured in England…
The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics” contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.
This paper deals with the determinants of the exchange rate and develops a monetary view (or more generally, an asset view) of exchange rate determination. The first part traces some of the doctrinal origins of approaches to the analysis of equilibrium exchange rates. The second part examines some of the empirical hypotheses of the monetary approach as well as some features of the efficiency of the foreign exchange markets. Special emphasis is given to the role of expectations in exchange rate determination and a direct observable measure of expectations is proposed. The direct measure of expectations builds on the information that is contained in data from the forward market for foreign exchange. The empirical results are shown to be consistent with the hypotheses of the monetary approach.
International trade under inconvertible paper
- James W Angell
Angell, James W., 1922, International trade under inconvertible paper, Quarterly Journal of Economics 36, May, 30'9-412.
Tlhe theory of international prices (CamJridge, MA) Reprinted byThe purchasing power parity doctrine: A reappraksal
- James W Angell
Angell, James W., 1935, Tlhe theory of international prices (CamJridge, MA). Reprinted by A. M. Kelley, N<Y., 1965. Balassa, Bela, 1964, 'The purchasing power parity doctrine: A reappraksal, Journal of Political Economy 72, no. 6, December, 584-596.
A simple long-run model of exchange rate determination, unpublished maanilscript, InternationaS Monetary Fund The purchasing power parity docttine, Egqpte Con-temporaire
- Bilson
- John
Bilson, John F., 1977, A simple long-run model of exchange rate determination, unpublished maanilscript, InternationaS Monetary Fund, Washington, DC. Bresciani-Tutroni, Costantino, 1931., The purchasing power parity docttine, Egqpte Con-temporaire. Reprinted in his Saggi Di Economia, 1961 (Miiano) 91-122.
PPP: Perspectiw and evidence Brillembonrg Purchasing power parity tests of causality and equilibrium, Research Department, i[ntemhtional Monetary Fund
- J * A F~wzkel
J*. A. F~wzkel, PPP: Perspectiw and evidence Brillembonrg, Arturo, 1976, Purchasing power parity tests of causality and equilibrium, Research Department, i[ntemhtional Monetary Fund, DM/76/117, Washington, DC. Bunting, Frederick H., 193'3, Purch&;ing power parity theory reexamined, Southern Economic Journal 5, no. 3, January, 282-301.
The world's monetary problems
- Cassel
- Gustav
Cassel, Gustav, 1921, The world's monetary problems (Constable, London).
Post-war monetary stabili.zation (Columbia University Press
- Cassel
- Gustav
Cassel, Gustav, 1928, Post-war monetary stabili.zation (Columbia University Press, NWJ York).
Money and foreign exchange after
- Cassel
- Gustav
Cassel, Gustav, 1930, Money and foreign exchange after 1919 (Macmillan, L.Bndon).
The equilibrium rate of exchang e, in: Explorations in economics: Notes and essays contributed in honor of F
- Ellis
- Howard
Ellis, Howard S., 1936, The equilibrium rate of exchang e, in: Explorations in economics: Notes and essays contributed in honor of F.W. Taussig (McGraw-Hill, New Yurk).
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