Testing the productivity bias hypothesis in Middle East countries

Abstract

Divergence of the purchasing power parity from the equilibrium exchange rate is attributed to various factors. Productivity differentials between the countries are said to be one of the main sources, which lead to productivity bias hypothesis. The hypothesis suggests that a relatively more productive country should experience a real appreciation of its currency. This research aims at testing the hypothesis in Middle East countries using the time series data over the period of 1970-2015 and by employing ARDL approach to cointegration. The econometric results support the hypothesis is only in the case of Bahrain, Kuwait and Saudi Arabia. This research also provides policy recommendations on the basis of empirical results.

Testing the productivity bias hypothesis for Brazil

“…Time Series Studies: First time series study is conducted by Hsieh (1982) by using data for Germany and Japan for the 1954-1976 period. The findings support PBH.Other time series studies: Rogoff (1992), Egert (2002),Bahmani-Oskooee and Nasir (2004), Chowdhury (2012), Apergis (2013), Cardi and Restout (2015), Halıcıoglu and Ketenci (2018).…”

Productivity Bias Hypothesis: New Evidence from Parallel Market Exchange Rate

“…On the other hand, must studies on time series analysis have supported the PBH (Halicioglu and Ketenci, 2017;Wang et. al., 2016;Anwar and Ali, 2015;Cardi and Restout, 2015;Bahmani-Oskooee and Nasir, 2005;Rogoff,1992;Bahmani-Oskooee, 1992;Hsieh, 1982) while few studies rejected the hypothesis (Halicioglu and Ketenci, 2017;Bahmani-Oskooee and Nasir, 2005;Bahmani-Oskooee, 1992). As noted by Bahmani-Oskoee and Gelan (2006) and Bahmani-Oskooee and Nasir (2004) studies on time series data especially in sub-Saharan African countries is rare in number.…”

“…However, the bulk of existing studies did not make use of parallel or black-market exchange rate in their analyses which is found in the literature to reflect the true market price. Contributing to the debate, Halicioglu and Ketenci (2017) empirically tested the validity of productivity bias hypothesis in eighteen Middle East countries using ARDL bound test and stability test. A country specific study was conducted for the eighteen countries.…”

“…The author found long-term cointegration relationships between productivity growth and relative prices while the link between relative prices and real exchange rate is found to be much weaker. Similarly, Halicioglu and Ketenci (2017) examined the validity of the hypothesis in seventeen Middle East countries from 1970 to 2015. Applying autoregressive distributed lag as the estimation technique, the results revealed that productivity bias hypothesis only holds in Bahrain, Kuwait and Saudi Arabia.…”

“…The roles played by productivity bias in determining long run growth have led many researchers to examine the validity of PBH. Extant studies on PBH can be broadly classified as mixed (Iyke and Odhiambo, 2017;Halicioglu and Ketenci, 2017;Wang et. al., 2016;Anwar and Ali, 2015;Widodo, 2015;Genius and Tzouvelekas, 2008;Ericsson and Irandoust, 2004;Bahmani-Oskooee and Nasir, 2004;Faria and Ledesma, 2003;Bahmani-Oskooee and Nasir, 2001).…”