Testing the Validity of Purchasing Power Parity for Brics Countries Using Non-Linear Unit Root Test (original) (raw)

Testing deviations from PPP and UIP: evidence from BRICS economies

Studies in Economics and Finance, 2020

Purpose This paper aims to investigate the interrelations between purchasing power parity (PPP) and uncovered interest parity (UIP) in BRICS economies, namely, Brazil, Russia, India, China and South Africa, by checking the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach. Further, this study tests whether the CHEER results are data frequency-dependent. Design/methodology/approach The present study uses monthly data ranging from 1997M01 to 2016M12 and considers the US economy as the representative foreign country. The study uses structural break unit root test and structural break cointegration technique to test the presence of economic relationships between nominal exchange rates and each of the price and interest rate differentials. Then, the study examines the validity of the CHEER approach by testing the appropriate theoretical restrictions. Findings The cointegration results suggest the existence of two cointegrating vectors representing UIP and PPP co...

Purchasing Power Parity: A Unit Root, Cointegration and VAR Analysis in Emerging and Advanced Countries

The purpose of this study is to investigate the validity of the absolute version of the purchasing power parity (PPP) of a sample of four advanced and four emerging countries covering the period from 1993 to 2014. To examine the existence of PPP we apply the Augmented Dickey-Fuller, DF-GLS and KPSS tests for non-stationarity, and the Johansen procedure for cointegration between exchange rates and consumer price indices. The impulse response function presents a graphical view which is consistent with impressions from the statistics of stationarity tests. We also employ the variance decomposition method to analyze the movements in the exchange rates and the price indices that are caused by their own shocks, and shocks caused by other variables. With respect to half-life estimates, the results from a shock to the real exchange rate range from 9,76 to 77,39 months. Overall, unit root tests show that absolute PPP may hold, but this depends on the country and the selected method. In contrast, the Johansen approach does not support the existence of PPP in any country.

Purchasing power parity: Evidence from developing Countries

International Advances in Economic Research, 2002

This paper utilizes the dynamic error-correction model (DECM) to examine the issue of purchasing power parity (PPP) for 11 developing countries (Argentina, Bolivia, Colombia, Cote d'Ivoire, Ecuador, Guatemala, Kenya, Nigeria, Peru, South Africa, and Venezuela). For comparison purposes, evidence from the traditional unit root methods of the augmented Dickey-Fuller (ADF) and Phillips-Perron is presented. The results from the conventional unit root tests failed to find evidence of PPP in all of the cases. However, the results from the generalized error-correction model detected evidence of PPP for nine out of the 11 countries under consideration. Based on these results, it was concluded that PPP holds in the long-run for the sample countries and that the implicit restrictions associated with unit root tests prevented earlier studies from finding evidence in support of PPP theory. (JEL F31); existence of unit roots in the real exchange rate could not be rejected. For example, Adler and Lehmann [1983], using the conventional test, found that the real exchange rate follows a random walk and concluded that there is no tendency for the PPP to hold in the long-run. and Manzur and Ariff [1995] investigated the existence of PPP for the Group Seven (G7) countries in conjunction with the ASEAN countries. They rejected the hypothesis of unit roots based on the results from the Sim's test. However, when they applied the Dickey-Fuller (DF), Augmented Dickey-Fuller (ADF), and Phillips-Perron (PP) tests, the hypothesis of unit root in the exchange rate could not be rejected. They therefore concluded that PPP holds in the long-run. Similarly, Abuaf and Jorian [1990] also found evidence in support of PPP in the long-run. Whitt [1992] investigated the hypothesis that the exchange rate follows a random walk using monthly data and Sim's test. He found that the real exchange rate does not follow a random walk, which indicates that PPP holds in the long-run.

Purchasing Power Parity Hypothesis In OIC Countries: Evidence From Panel Unit Root Tests With Heterogeneous Structural Breaks

iranian economic review, 2010

Purchasing power parity hypothesis is viewed as one of the central doctrines in international economics. The hypothesis states an equilibrium condition equating the nominal exchange rate between two national currencies with the relative price of an identical basket of traded goods in each country. Empirical analysis has produced mixed results in testing for the PPP. This paper analyzes the empirical validity of PPP hypothesis in OIC countries. Hence, it examines the stationarity of real exchange rate by ADF unit root test and various panel unit root tests. Using univariate ADF unit-root test on single time series and also the conventional panel unit root tests namely, Im, Pesaran, and Shin (2003), Levin, Lin & Chu (2002), and Hadri (2000), it was found that the real exchange rate of all OIC countries and also panel series of real exchange rate have unit root. But when recently developed panel LM unit root test that allow for heterogeneous level shifts, are applied, the null unit roo...

Purchasing power parity in GIIPS countries: evidence from unit root tests with breaks and non-linearity

Applied Economic Analysis

Purpose This paper aims to test purchasing power parity (PPP) hypothesis for Greece, Italy, Ireland, Portugal and Spain, which are known as the GIIPS countries. Design/methodology/approach The authors conduct a comprehensive analysis by using unit root approaches without and with structural breaks and non-linearity. Findings The PPP is valid for the GIIPS countries. Considering structural breaks in non-linear framework plays a crucial role. Originality/value There is no empirical study testing PPP hypothesis by focusing on the GIIPS countries. This study further takes into account for structural breaks and non-linearity in the real exchange rates of these countries.

Panel unit root and cointegration test of purchasing power parity : A study of selected African countries

2015

The purpose of this research is to test the validity of the purchasing power parity (PPP) theory in Africa. The theory is tested through the use of panel unit root and cointegration techniques. Based on the annual data covering the period of 1980-2012, panel unit root tests of Levin, Lin and Chu (2002) and Im, Pesaran and Shin (2003) are conducted on the real exchange rate of the studied countries. The results based on the unit root tests failed to validate the theory in its strong form. However, based on the Pedroni (1995, 1996) cointegration test of price indices and exchange rates, the results appeared remarkable in favor of long term applicability of PPP as a cointegration concept. Further test on the long run relationship revealed that domestic prices played a vital role in determining the equilibrium exchange rates (hence PPP) as far as this data is concern. As concerns major policy, based on this study, these countries could use the PPP theory to determine the equilibrium exc...

Purchasing Power Parity in the SAARC Region: Evidence from Unit Root Test with Cross-Sectional Dependence

The Journal of Developing Areas, 2015

Mixed results on the validity of Purchasing Power Parity (PPP) relationship in South Asian countries motivates this paper to conduct a further inquiry. Existing studies lack appropriate treatment of crosscountry dependence in the testing procedure. In this paper we employ a method that allows us to identify the degree of cross-sectional dependence (CSD) and apply panel unit root test to accommodate this dependence on the real exchange rate series of five South Asian countries in the South Asian Association of Regional Cooperation (SAARC) which include Bangladesh, India, Pakistan, Sri Lanka and Nepal. We find evidence of strong crosscountry dependence, crosscountry correlation being 0.735. Our panel unit test results support the validity of long-run PPP in the sample countries. This result is in contrast to the previous studies in similar countries which did not accommodate CSD in their estimation. This finding implies that real shocks do not have any permanent effect on the real exchange rate and other things remaining the same, no active policy intervention is warranted for the sustainability of external balance.

Purchasing Power Parity in Developing Countries: Multi-Period Evidence Under the Current Float

World Development, 2003

Using panel unit root tests, we examine purchasing power parity (PPP) for US dollar real exchange rates of developing countries during the current floating rate period. Since evidence of PPP may vary from period to period, we examine the data for moving 10-year periods from 1976-85 up to 1990-99. We organize panels based on country characteristics influencing the validity of PPP. Those characteristics include openness, inflation, and the level and growth rate of per capita GDP. Although we find stronger evidence of PPP after 1980, our examination of panel data over 15 10-year periods yields only limited support for PPP.

Purchasing Power Parity in Pakistan: Evidence from Fourier Unit Root Tests

Emerging Markets Finance and Trade, 2020

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.