Is Purchasing Power Parity Overvalued?

Wu, Jyh‐Lin; Wu, Shaowen

doi:10.2307/2673895

Cited by 84 publications

(72 citation statements)

References 21 publications

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“…Papell and Theodoridis (2001) and Wu and Wu (2001) They show that 72 years of stationary (monthly) data is needed to accept PPP with a mean reversion coefficient of 0.981 (equivalent to a half-life of three years).…”

Section: Hwkrgrorj\mentioning

confidence: 99%

Purchasing power parity and the euro area

Koedijk¹,

Tims²,

Dijk³

2004

Journal of International Money and Finance

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This paper analyzes purchasing power parity (PPP) for the euro area. We study the impact of the introduction of the euro in 1999 on the behavior of real exchange rates. We test the PPP hypothesis for a panel of real exchange rates within the euro area over the period 1973-2003. Our methodology exploits the cross-sectional dependence across real exchange rates and allows for heterogeneity in the rates of mean reversion. We present evidence in favor of PPP for the full panel of real exchange rates, but we show that accounting for cross-country differences within the euro area is essential. The unit root hypothesis can be rejected for some real exchange rates, but evidence for PPP is weak for others. We also investigate PPP between the "synthetic" euro against several other major currencies over the period 1979-2003. We find support for the PPP hypothesis for the full panel of real exchange rates. When the restriction of a common mean reversion coefficient is relaxed, we reject the unit root hypothesis for the euroSwiss franc rate only. We conclude that the process of economic integration in Europe has accelerated convergence toward PPP within the euro area. This paper analyzes purchasing power parity (PPP) for the euro area. We study the impact of the introduction of the euro in 1999 on the behavior of real exchange rates. We test the PPP hypothesis for a panel of real exchange rates within the euro area over the period 1973-2003. Our methodology exploits the cross-sectional dependence across real exchange rates and allows for heterogeneity in the rates of mean reversion. We present evidence in favor of PPP for the full panel of real exchange rates, but we show that accounting for cross-country differences within the euro area is essential. The unit root hypothesis can be rejected for some real exchange rates, but evidence for PPP is weak for others. We also investigate PPP between the "synthetic" euro against several other major currencies over the period 1979-2003. We find support for the PPP hypothesis for the full panel of real exchange rates. When the restriction of a common mean reversion coefficient is relaxed, we reject the unit root hypothesis for the euro-Swiss franc rate only. We conclude that the process of economic integration in Europe has accelerated convergence toward PPP within the euro area. 5001-6182 Business. H\ZRUGVEuropean integration, real exchange rates, purchasing power parity, heterogeneous SUR

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Section: Hwkrgrorj\mentioning

confidence: 99%

Purchasing power parity and the euro area

Koedijk¹,

Tims²,

Dijk³

2004

Journal of International Money and Finance

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“…We used three data generating models in the Monte Carlo simulation-the driftless random walk model, the ARMA model, and the AR model with cross-sectionally dependent errors-to calculate the p-value of the individual minimum t-type unit root test from its empirical distribution. In particular, in the case of the AR model with cross-sectionally dependent errors, the empirical distribution of the test for each province was generated on the bootstrap samples, which were obtained by the resampling procedure proposed by Maddala and Wu (1999) and Wu and Wu (2001). On the basis of their geographical locations, the provinces were grouped into the following three regions: the Eastern, Central, and Western regions.…”

Section: Resultsmentioning

confidence: 99%

“…, where Maddala and Wu (1999) and Wu and Wu (2001). The procedure followed herein is elaborated below.…”

Section: Construction Of Panel Unit Root Test With Breaksmentioning

confidence: 99%

“…The p-values of the t-type unit root tests for each province, which are combined by the panel unit root tests based on Fisher's p-values combination approach, are calculated by Monte Carlo simulation under three data generating models-the driftless random walk model, the ARMA model, and the AR model with cross-sectionally dependent errors. In particular, in the case of cross-sectional dependence between error terms, the bootstrap method proposed by Maddala and Wu (1999) and Wu and Wu (2001) is employed in order to correct the biases of the panel-based unit root tests. 7 The remaining sections of this paper are organized as follows: Section 2 defines convergence; Section 3 describes the econometric methodology; Section 4 briefly mentions the data and discusses the empirical results; and Section 5 presents the conclusions.…”

Section: Introductionmentioning

confidence: 99%

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China's regional convergence in panels with multiple structural breaks

Matsuki

Usami

2011

Applied Economics

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This study investigates the existence of regional convergence of per capita outputs in China from 1952-2004, particularly focusing on considering the presence of multiple structural breaks in the provincial-level panel data. First, the panel-based unit root test that allows for occurrence of multiple breaks at various break dates across provinces is developed; this test is based on the p-value combination approach suggested by Fisher (1932). Next, the test is applied to China's provincial real per capita outputs to examine the regional convergence in China. To obtain the p-values of unit root tests for each province, which are combined to construct the panel unit root test, this study assumes three data generating processes: a driftless random walk process, an ARMA process, and an AR process with cross-sectionally dependent errors in Monte Carlo simulation.The results obtained from this study reveal that the convergence of the provincial per capita outputs exists in each of the three geographically classified regions-the Eastern, Central, and Western regions-of China.

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“…These bootstrap errors are subjected to the panel unit root tests. In the third procedure, we work directly with the residuals from the cointegrating equations (ˆi t e ) and apply a bootstrap similar to Wu and Wu (2001). Namely, we construct I(1) bootstrap versions of these residuals, ˆb it e , and conduct panel unit root tests on these bootstrap series.…”

Section: A Unit Root Testsmentioning

confidence: 99%

The Monetary Model Strikes Back: Evidence From the World

Cerra

Saxena

2008

IMF Working Papers

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We revisit the dramatic failure of monetary models in explaining exchange rate movements. Using the information content from 98 countries, we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals. We also find fundamentals-based models very successful in beating a random walk in out-of-sample prediction.The views expressed in this paper are those of the authors and do not necessarily represent the views or policies of the IMF or BIS.-2 -

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Is Purchasing Power Parity Overvalued?

Cited by 84 publications

References 21 publications

Purchasing power parity and the euro area

Purchasing power parity and the euro area

China's regional convergence in panels with multiple structural breaks

The Monetary Model Strikes Back: Evidence From the World

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