Purchasing power parity in the long run and structural breaks: evidence from real sterling exchange rates

AbstractIn this paper we use a long memory framework to examine the validity of the Purchasing Power Parity (PPP) hypothesis using both monthly and quarterly data for a panel of 47 countries over a 50 year period (1957–2009). The analysis focuses on the long memory parameter d that allows us to obtain different convergence classifications depending on its value. Our analysis allows for the presence of smooth structural breaks and it does not rely on the use of a benchmark. Overall the evidence strongly points to the presence of a long memory process, where 0.5<d<1. The implication of our results is that we find long memory mean reverting convergence, something that is also consistent with Pesaran, M. H., R. P. Smith, T. Yamagata, and L. Hvozdyk. 2009. “Pairwise Tests of Purchasing Power Parity.” Econometric Reviews 28: 495–521. In explaining the speed of convergence as captured by the estimated long memory parameter d we find impediments to trade such as distance between neighboring countries and sticky prices to be mainly responsible for the slow adjustment of real exchange rates to PPP rather than nominal rates for all country groups but Asia, where the opposite is true.

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Exchange rates, market efficiency and purchasing power parity: Long-run tests for the Latin American currencies

Problemas del Desarrollo Revista Latinoamericana de Economía ◽

10.22201/iiec.20078951e.2005.141.7582 ◽

2009 ◽

Vol 36 (141) ◽

Cited By ~ 1

Author(s):

ALEJANDRA CABELLO ◽

RAÚL DE JESÚS ◽

ROBERT JOHNSON ◽

EDGAR ORTÍZ

Keyword(s):

Exchange Rates ◽

Market Efficiency ◽

Latin American ◽

Purchasing Power Parity ◽

Purchasing Power ◽

Power Parity ◽

Long Run

En mercados eficientes, los precios corrientes reflejan toda la información disponible. Los precios pasados no contienen ninguna información útil para predecir precios futuros y realizar ganancias extraordinarias. Este principio, hipótesis débil de la eficiencia informativa de los mercados, ha sido incorporado a la teoría de la paridad del poder adquisitivo (PPA), a fin de sobreponer sus limitaciones en el análisis intertemporal del ajuste de los tipos de cambio a las tendencias inflacionarias. En general, estudios de mercados de divisas de los países desarrollados validan su eficiencia; sin embargo, la investigación para el caso de los países en vías de desarrollo es limitada. En este trabajo se analiza la eficiencia de los mercados de divisas de 15 países latinoamericanos para el periodo 1970-2000. Basándose en el modelo ampliado de PPA, se aplican dos modelos de análisis de regresión y uno de raíz unitaria.

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PERSISTENCE OF REAL EXCHANGE RATES IN THE CENTRAL AND EASTERN EUROPEAN COUNTRIES

Journal of Business Economics and Management ◽

10.3846/16111699.2015.1101396 ◽

2016 ◽

Vol 17 (3) ◽

pp. 381-396

Author(s):

Ahmad Zubaidi BAHARUMSHAH ◽

Siew-Voon SOON ◽

Stilianos FOUNTAS ◽

Nurul Sima MOHAMAD SHARIFF

Keyword(s):

Exchange Rates ◽

Confidence Intervals ◽

Purchasing Power Parity ◽

Structural Breaks ◽

Real Exchange Rates ◽

European Countries ◽

Purchasing Power ◽

Eastern European ◽

Power Parity ◽

Eastern European Countries

We investigate the mean reversion in real exchange rates for Central and Eastern European countries. We use point and confidence interval estimates from the Phillips et al.’s (2001) local-persistent model as our preferred measures of the persistence of real exchange rates. We find that the adjustment to purchasing power parity is more rapid after accounting for structural breaks, with half-life deviation from parity below 18 months, which is consistent with the explanation based on nominal rigidities. The estimated narrow confidence intervals for the half-lives invalidate the purchasing power parity puzzle for transition and some core European Union countries. The novelty of our results lies in the finding of strong evidence for purchasing power parity as the local-persistent model produces shorter half-lives and much narrower corresponding confidence intervals than those obtained by standard Dickey-Fuller and local-to-unity models. Our evidence for PPP suggests that the transition countries have maintained their long-run competitiveness against their trading partners.

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