NONLINEAR ARDL APPROACH AND PPP: EVIDENCE FROM 82 COUNTRIES

2021 ◽  
pp. 1-17
Author(s):  
AUGUSTINE C. ARIZE ◽  
MOHSEN BAHMANI-OSKOOEE
Keyword(s):  
New York ◽  
Purchasing Power Parity ◽  
Nominal Exchange Rate ◽  
Power Parity ◽  
Bounds Testing ◽  
Relative Prices ◽  
Econometric Methods ◽  
Nonlinear Ardl ◽  
Error Correction Modeling ◽  
Asymmetric Cointegration

Since the introduction of asymmetric cointegration and error-correction modeling, old theories have been getting a renewed attention, and purchasing power parity theory (PPP) is no exception. In this paper, we revisit the PPP by applying this relatively new technique. When we applied the symmetric cointegration test of Pesaran et al. [Pesaran, MH, Y Shin and RJ Smith (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326], we found cointegration between the nominal exchange rate and relative prices in 22 out of 82 countries. However, application of the asymmetric cointegration method of Shin et al. [Shin, Y, B Yu and M Greenwood-Nimmo (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In R. Sickels and W. Horrace (eds.), Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications, pp. 281–314. New York: Springer] increased the number to 51 out of 82 countries. Nonlinear adjustment of relative prices was said to be the main contributing factor.

scholarly journals Do Expectations Play Any Role in Determining Pak Rupee Exchange Rates?

1997 ◽  
Vol 36 (3) ◽  
pp. 263-273
Author(s):  
Razzaque H. Bhatti
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Purchasing Power Parity ◽  
Foreign Currency ◽  
Nominal Exchange Rate ◽  
Power Parity ◽  
Relative Prices

This paper presents some evidence on the role of expectations in the determination of Pak rupee exchange rates vis-à-vis the dollar, pound, and yen over the period 1982:1– 1993:7. Results of cointegration and coefficient restriction tests in two out of three cases are supportive of the view of exchange rate determination in postulating that in efficient markets in which uncertainty and expectations about the future are dominant, the equilibrium nominal exchange rate is determined not only by current relative prices but also by the expected real exchange rate. These results are supportive of ex ante purchasing power parity, implying that the real exchange rate follows a random walk. These results also suggest that the anticipated inflation rate is higher in Pakistan than in other countries, which tends to encourage the domestic residents to convert their current balances into foreign currency, so that the terms of trade deteriorate and offset much of gains of the continuous devaluation of Pak rupee by undermining external competitiveness.

scholarly journals Exchange Rate Appreciation, International Competitiveness And Purchasing Power Parity: The Shiomi Company Of Japan

2016 ◽  
Vol 12 (3) ◽  
pp. 135-144
Author(s):  
John F. Boschen
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Financial Management ◽  
Nominal Exchange Rate ◽  
Purchasing Power ◽  
Power Parity ◽  
Consumer Prices ◽  
The Us ◽  
Cost Competitiveness ◽  
International Financial Management

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.

scholarly journals DOES THE BALASSA–SAMUELSON THEORY EXPLAIN THE LINK BETWEEN RELATIVE POPULATION GROWTH AND PURCHASING POWER PARITY?

2013 ◽  
Vol 58 (01) ◽  
pp. 1350007 ◽  
Author(s):  
A. F. M. KAMRUL HASSAN ◽  
RUHUL SALIM
Keyword(s):  
Exchange Rate ◽  
Population Growth ◽  
Purchasing Power Parity ◽  
Panel Cointegration ◽  
Least Square ◽  
Power Parity ◽  
Relative Population ◽  
Relative Prices ◽  
Stable Relationship ◽  
Long Run

Relative population growth affects relative prices through the so-called Balassa–Samuelson (BS) mechanism and that in turn impacts PPP. This paper empirically investigates the relationship between the PPP exchange rate and relative population growth in a panel of 80 selected countries. Following the BS hypothesis, this paper argues that relative population growth affects nominal wages that impact price levels and thereby impacts PPP. Using panel cointegration and fully modified ordinary least square (FMOLS), the empirical results show that there is a stable relationship between PPP exchange rate and relative population growth in the long run. These empirical findings suggest that population growth have an important role in exchange rate determination through PPP.

Purchasing Power Parity and Real Exchange Rates

2019 ◽  
Author(s):  
Menzie D. Chinn
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Purchasing Power Parity ◽  
Time Horizon ◽  
Nominal Exchange Rate ◽  
Purchasing Power ◽  
Power Parity ◽  
The Real ◽  
Short Run

The idea that prices and exchange rates adjust so as to equalize the common-currency price of identical bundles of goods—purchasing power parity (PPP)—is a topic of central importance in international finance. If PPP holds continuously, then nominal exchange rate changes do not influence trade flows. If PPP does not hold in the short run, but does in the long run, then monetary factors can affect the real exchange rate only temporarily. Substantial evidence has accumulated—with the advent of new statistical tests, alternative data sets, and longer spans of data—that purchasing power parity does not typically hold in the short run. One reason why PPP doesn’t hold in the short run might be due to sticky prices, in combination with other factors, such as trade barriers. The evidence is mixed for the longer run. Variations in the real exchange rate in the longer run can also be driven by shocks to demand, arising from changes in government spending, the terms of trade, as well as wealth and debt stocks. At time horizon of decades, trend movements in the real exchange rate—that is, systematically trending deviations in PPP—could be due to the presence of nontraded goods, combined with real factors such as differentials in productivity growth. The well-known positive association between the price level and income levels—also known as the “Penn Effect”—is consistent with this channel. Whether PPP holds then depends on the time period, the time horizon, and the currencies examined.

scholarly journals Investigating the ppp theory and long-run estimates for five Asian countries

2018 ◽  
Vol 7 (4.28) ◽  
pp. 26
Author(s):  
Niri Martha Choji ◽  
Siok Kun Sek
Keyword(s):  
Least Squares ◽  
Purchasing Power Parity ◽  
Unit Root ◽  
Ordinary Least Squares ◽  
Nominal Exchange Rate ◽  
Purchasing Power ◽  
Asian Countries ◽  
Power Parity ◽  
Panel Unit Root ◽  
Long Run

The theory of purchasing power parity (PPP) theory posits that the conversion rate between two currencies ought to be the same as the ratio of the total price levels between two currencies. Using monthly recent panel data for five Asian countries, from the period 1996M01-2016M08, the paper examined the PPP theory by utilizing robust methods of panel unit root and cointegration (Pesaran and Westerlund) tests that put into consideration cross-sectional dependence. The panel unit root test results show that all the variables considered are not stationary at levels but stationary at first difference (all variables are I(1)), because of that, the cointegration test was carried out. Results showed the presence of long-run relationship among the variables implying that the purchasing power parity theory exists in the long-run. Furthermore, the long-run relationships were estimated using the dynamic ordinary least squares (DOLS), fully modified ordinary least squares (FMOLS) and the mean group (MG) estimators. Surprisingly, all these estimators gave similar results, they showed that the domestic prices cause depreciation while the foreign prices cause appreciation of the nominal exchange rates in the five Asian countries. Generally, the effect of nominal exchange rate appreciation is more than depreciation in the five Asian countries.

Does Oil Price Asymmetrically Impact Remittance Outflows? The Case of Oman

2019 ◽  
Vol 15 (2) ◽  
Author(s):  
Selçuk Akçay
Keyword(s):  
New York ◽  
Oil Prices ◽  
Oil Price ◽  
Distributed Lag ◽  
Nonlinear Ardl ◽  
Distributed Lag Model ◽  
Long Run ◽  
Lag Model ◽  
Asymmetric Impact ◽  
Asymmetric Cointegration

Abstract The mechanism by which oil price affects remittance outflows is not well understood and investigated. Using non-linear autoregressive distributed lag model (Shin, Yu, and. Greenwood-Nimmo. 2014. “Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework.” In Festschrift in Honor of Peter Schmidt, vol. 44, edited by R. C. Sickles, and W. C. Horrace, 281–314. New York: Springer New York. https://doi.org/10.1007/978-1-4899-8008-3_9), this study mainly seeks to investigate the asymmetric impact of oil prices on remittance outflows over the period from 1975 to 2015, for an oil-based economy, Oman. The results of the study reveal that changes in oil price are asymmetrically associated with remittance outflows in both short and long run. Furthermore, the response of remittance outflows to developments in oil prices is different in a way that positive shocks in oil prices promote remittance outflows, while negative shocks have no significant impact.

scholarly journals Speed of Reversion to PPP with Structural Breaks for Brazilian Cities

2018 ◽  
Vol 10 (4) ◽  
pp. 15
Author(s):  
Felipe S. Bastos ◽  
Elano F. Arruda ◽  
Rafael B. Barbosa ◽  
Roberto T. Ferreira
Keyword(s):  
Purchasing Power Parity ◽  
Half Life ◽  
Structural Breaks ◽  
Structural Changes ◽  
Structural Break ◽  
Convergence Speed ◽  
Purchasing Power ◽  
Power Parity ◽  
Relative Prices

This article analyzes the effect of introducing structural breaks in calculating the convergence speed of relative prices for Brazilian cities in the period from 1991.01 to 2016.11. Three structural break dates were endogenously chosen (1996.02, 2001.12 and 2010.10) and they represent different situations of the Brazilian economy, with impacts on intra-national relative prices. The convergence speed, measured by the half-life, declined by approximately 77% after controlling for these structural changes. The result was robust to changes in numeraire both for calculation of the half-life and estimation of the structural break dates, and indicates the importance of considering structural breaks in calculating intra-national purchasing power parity, as found in other studies.

scholarly journals Burgernomics: An Instructional Case on the Law of One Price

2016 ◽  
Vol 12 (2) ◽  
pp. 77-82
Author(s):  
Carolin E. Schmidt
Keyword(s):  
New York ◽  
Financial Markets ◽  
Undergraduate Students ◽  
Purchasing Power Parity ◽  
International Economics ◽  
Law Of One Price ◽  
Rate Theory ◽  
Power Parity ◽  
Product Pricing ◽  
The Law

Jane just moved back to her hometown in Western New York to start a job at a bank. One evening, she meets her old friend Sally, who traveled the world for the past five months and tells Jane about her experiences with the different price levels in all the countries that she visited. Jane, being a recent graduate in international economics and finance, understands the underlying dynamics that are due to exchange rate theory and sheds light on the price discrepancies prevailing between the different currencies.This case focuses on the construction of the Big Mac index and on conveying the theoretical basis of the index (Purchasing Power Parity and the Law of One Price) to undergraduate students in business and economics. It is appropriate for use in undergraduate courses such as international finance, financial markets or international economics. It could also be used in (international) marketing courses to show the importance of product pricing. 

Sign in / Sign up

Export Citation Format

Share Document