Purchasing power parity and structural instability in the US/UK exchange rate

In 2011 the ongoing appreciation in the yen against the US$ led Japanese firm Shiomi to consider relocating its production facilities outside of Japan. As a prelude to making this decision, Shiomi commissioned an evaluation of the historical impact of the yen’s appreciation on Japanese competitiveness. This evaluation is the basis for two important lessons in international financial management. First, it is the real exchange rate, rather than the nominal exchange rate, that determines the relative cost competitiveness of countries. Second, in accordance with the rules of purchasing power parity, the historical evaluation showed that higher inflation in the U.S. relative to Japan caused the ratio of Japanese to U.S. prices to fall at roughly the same rate as the yen’s appreciation against the US$. Thus the long-term appreciation in the yen had little impact on Japanese competitiveness. Students are asked to assess the relocation decision in light of the post-case data on exchange rates and consumer prices supplied in the case. The case is appropriate for use in an international financial management or international economics course.

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The Validity of the Purchasing Power Parity Hypothesis for Kuwait

Modern Applied Science ◽

10.5539/mas.v11n1p188 ◽

2016 ◽

Vol 11 (1) ◽

pp. 188

Author(s):

Ebrahim Merza

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Purchasing Power Parity ◽

Unit Roots ◽

Purchasing Power ◽

Power Parity ◽

Monthly Data ◽

The Real ◽

The Us ◽

Augmented Dickey Fuller

Many studies have tested the null hypothesis of the unit root of the real exchange rate to examine the validity of the purchasing power parity (PPP) hypothesis. Previous studies have reached different conclusions regarding that issue. This study tests the hypothesis of PPP in Kuwait using two tests of unit roots, the Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests. Using monthly data from 2006 to 2015, both tests reject the PPP hypothesis for the Kuwaiti economy. Using the components of the real exchange rate, we find that the levels of prices in both Kuwait and the US are not moving together to provide stationarity for the real exchange rate. This result could be attributed to the large increases in the prices of the housing and food and beverages sectors in Kuwait during that time.

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Purchasing power parity in the Colombian exchange rate

Ánfora ◽

10.30854/anf.v25.n45.2018.515 ◽

2018 ◽

Vol 25 (45) ◽

pp. 123-143

Author(s):

Oscar Hernán Cerquera Losada ◽

Camilo Fabiam Gómez Segura ◽

Cristian José Arias Barrera

Keyword(s):

Exchange Rate ◽

Purchasing Power Parity ◽

Imperfect Competition ◽

Structural Changes ◽

Social Economic ◽

Unit Roots ◽

Purchasing Power ◽

Power Parity ◽

The Us ◽

Us Dollar

Objetive: to determine the fulfillment of the purchasing power parity (PPP) theory in Colombia, the exchange rate with the US dollar using as a standard. Methodology: to check if the PPP in Colombia is achieved, monthly and quarterly data was used, which ran from January 1959 to December 2015. To do this, the longterm behavior from the real exchange rate was modeled, contrasting the unit roots presence and structural changes. In addition, a bivariate cointegration model was used. Results: it was found that, in the case of Colombia, the PPP theory was not fulfilled, since the peso and the dollar are not cointegrated. Therefore, according to the unitary root methodology, the PPP hypothesis in Colombia for the period 1959- 2015 is not validated. Everything seems to indicate that the Colombian peso has little relation with the US dollar. Conclusions: the use of general price indices, which include tradable goods between countries, multiple barriers to international trade, imperfect competition and social, economic, political and cultural differences between both countries are important aspects when explaining the unfulfillment of the PPP

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