Is the evidence for PPP reliable? A sustainability examination of the stationarity of real exchange rates

Zhou, Shuhua; Kutan, Ali M.

doi:10.1016/j.jbankfin.2011.02.006

Cited by 30 publications

(19 citation statements)

References 28 publications

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“…Contrary to the above-mentioned studies, testing results for the stationarity of real exchange rates appear to be distinctly heterogeneous in the research presented by Zhou and Kutan (2011). In their cases of PPP evidence for countries in the euro area, the adjustment of real exchange rates frequently obeys nonlinear dynamics.…”

Section: An Overview Of the Literaturementioning

confidence: 76%

“…The aim of this paper is to implement, in addition to the conventional augmented DickeyFuller (ADF) test, the Kapetanios et al (2003) (hereafter KSS) unit root test that accounts for possible nonlinear adjustment of real exchange rates for 11 countries of the euro area (EA-11). The empirical literature on the PPP theory for the original euro area economies is rather limited, while the results of explicit tests are surprisingly mixed (Chang, Chang, & Su, 2013;Christidou & Panagiotidis, 2010;Wu & Lin, 2011;Zhou & Kutan, 2011). From the perspective of European integration processes it is especially intriguing to observe their effects on the stationarity characteristics of real exchange rates and on the overall price convergence in this region.…”

Section: Open Accessmentioning

confidence: 99%

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Is the PPP valid for the EA-11 countries? New evidence from nonlinear unit root tests

Kavkler

Boršič

Bekő

2016

Economic Research-Ekonomska Istraživanja

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In the empirical literature there is a prevalent view that real exchange rates tend to converge towards levels predicted by the Purchasing Power Parity (PPP) only in the long-run and that short-run deviations from the PPP relationship are frequently sizable. The progressing of European monetary integration and the forming of monetary union spurred the interest of researchers to assess the relevance of the PPP theory in the case of the single European currency. Our paper therefore examines this exchange rate theory by testing a dataset of monthly real exchange rates for a sample of 11 eurozone members with respect to different benchmark currencies. Because of the documented drawbacks of linear specifications in examining this exchange rate theory, we utilise a nonlinear unit root test based on the ESTAR model proposed by Kapetanios, Shin, and Snell (2003). The results of unit root tests for the US dollar-based real exchange rate series as well as for Japanese yen-based series suggest that the PPP proposition does not hold in the case of eurozone countries. The absence of real exchange rates' nonlinear reversion reported in this study thus confirms the thesis of Wu and Lin (2011) regarding the PPP relationship since the inception of the euro.

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Section: An Overview Of the Literaturementioning

confidence: 76%

Section: Open Accessmentioning

confidence: 99%

Is the PPP valid for the EA-11 countries? New evidence from nonlinear unit root tests

Kavkler

Boršič

Bekő

2016

Economic Research-Ekonomska Istraživanja

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“…Compared to widely used Dickey Fuller (DF) and Philips Perron (PP) unit root tests, that has better power and size properties (Wickremasinghe, 2006) The main criticism of testing PPP is based on the deficiency of conventional unit root tests that they are assumed to be temporary shocks that have no long-run effect on a variable. It is also recognized that the outliers and breaks in data may lower the power of unit root tests and lead toward over-acceptance of the unit-root hypothesis (Zhou and Kutan, 2011). Employing unit root tests with structural breaks for RER is one way of resolving conventional unit root tests failure.…”

Section: Methodsmentioning

confidence: 99%

Purchasing Power Parity (Ppp) Between China And The U.S.: An Empirical Comparative Case Study

Mangır

Ertuğrul²,

Sawhney

2015

Pressacademia

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This study investigates the validity of Purchasing Power Parity (PPP) in explaining China's real exchange rate with regard to the US over the period [2000][2001][2002][2003][2004][2005][2006][2007][2008][2009][2010][2011][2012]. It applies traditional unit root tests, and the procedure developed by Zivot and Andrews and Lee-Strazicich to endogenously determine potential structural breaks. The results indicate that while the PPP hypothesis holds under China's former fixed ("pegged") exchange regime, that, in the long run, it no longer holds under China's current managed floating exchange rate regime. In general, the findings lend support to the position that the exchange rate regime affects the validity of PPP theory for explaining exchange rates between countries.

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“…In this case, price movements may exhibit nonlinear dynamics (Sarno et al, 2004;Fan and Wei, 2006;Cushman and Michael, 2011). Zhou and Kutan (2011) and Holmes and Maghrebi (2004) are studies on real interest rates and PPP in Asia that take into account the nonlinear adjustments during the 1997 crisis. To account for this important data feature, we use the heterogeneous unit root test proposed by Cerrato et al (2011), which tests the null hypothesis of unit root against a nonlinear ESTAR (exponential smooth transition autoregressive) alternative; this test also accommodates cross-section dependence.…”

Section: Convergence To the Law Of One Pricementioning

confidence: 99%

Assessing Market Integration in ASEAN with Retail Price Data

Dang

Yang

2016

Pacific Economic Review

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We assess the extent of market integration the Association of Southeast Asian Nations (ASEAN) using a comprehensive data set that contains actual local retail prices for 131 goods and services in ASEAN countries (except Laos and Myanmar) over the period of 1990-2013. We conduct two different, but complementary, approaches: analyzing price dispersion and testing for convergence to the law of one price via panel unit root tests. The 1997 Asian crisis and, to a lesser extent, the 2008 global crisis appear to have caused a considerable disruption in the process of market integration. Despite significant tariff reduction under the ASEAN Free Trade Area commitments in the past two decades, the level of price dispersion across ASEAN is higher in 2013 than in 1990. Panel unit root tests accounting for cross-section dependence show that convergence to the law of one price holds for only a minority of retail prices, including those of traded goods, in the ASEAN markets. We also consider a nonlinear exponential smooth transition autoregressive approach and a structural break as alternative adjustment dynamics in the panel unit root tests. Overall, our results suggest that there is much to be done in ASEAN to achieve a meaningful ASEAN economic community.

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Is the evidence for PPP reliable? A sustainability examination of the stationarity of real exchange rates

Cited by 30 publications

References 28 publications

Is the PPP valid for the EA-11 countries? New evidence from nonlinear unit root tests

Is the PPP valid for the EA-11 countries? New evidence from nonlinear unit root tests

Purchasing Power Parity (Ppp) Between China And The U.S.: An Empirical Comparative Case Study

Assessing Market Integration in ASEAN with Retail Price Data

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