Different measures in testing absolute purchasing power parity

Validity of Absolute Purchasing Power Parity in G7 Countries

“…They empirically tested absolute PPP by estimating coefficients and examining coefficient restrictions. Further, Zhang and Zou discussed which econometric method should be used in testing absolute PPP [9]. They used empirical evidences and an example to prove that the unit root test is not sufficient in testing absolute PPP.…”

“…They used empirical evidences and an example to prove that the unit root test is not sufficient in testing absolute PPP. Thus, in this paper, we use the coefficient restriction and the RER misalignment distribution tests proposed by Crownover et al, Zhang and Zou [8,9].…”

“…For the coefficient restriction test in Eq. 2, we follow Zhang and Zou [9] and use the Wald test. If the p-value for the χ 2 statistic in the Wald test is greater than a usual significant level (1%, 5%, or 10%), we accept the null hypothesis β 0 = 0 and β 1 = 1 and accept the absolute PPP theory.…”

“…Concretely, the validity of absolute PPP in G7 countries has been scarcely known since Crownover [8]. Zhang and Zou discuss absolute PPP of the 40 biggest countries against the US using panel data [9]. However, the panel data dimension cannot tell us whether or not absolute PPP holds between a pair of countries.…”

“…In popular studies (e.g., Lothian and Taylor [3]; Cheung et al [4]; Koedijk et al [5]; Bergin et al [6]; Huang and Yang [7]), the real exchange rates (RERs) are constructed by consumer, producer, wholesale, and other price indexes, rather than actual price levels. Thus, such constructed RER in these studies is used in testing relative PPP rather than absolute PPP (Crownover et al [8]; Zhang and Zou [9]). …”