scholarly journals Extracting Inflation from Stock Returns to Test Purchasing Power Parity

2005 ◽  
Vol 95 (1) ◽  
pp. 255-276 ◽  
Author(s):  
Bhagwan Chowdhry ◽  
Richard Roll ◽  
Yihong Xia
Keyword(s):  
Stock Returns ◽  
Purchasing Power Parity ◽  
Strong Support ◽  
Commodity Price ◽  
Relative Price ◽  
Purchasing Power ◽  
Power Parity ◽  
Price Inflation ◽  
Short Run ◽  
Relative Ppp

Relative purchasing power parity (PPP) holds for pure price inflations, which affect prices of all goods and services by the same proportion, while leaving relative prices unchanged. Pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount. Recognizing that relative PPP may not hold for the official inflation data constructed from commodity price indices because of relative price changes and other frictions that cause prices to be “sticky,” we provide a novel method for extracting a proxy for realized pure price inflation from stock returns. We find strong support for relative PPP in the short run using the extracted inflation measures.

scholarly journals Inflation and Exchange Rates: An International Examination of Relative Purchasing Power Parity

2021 ◽  
Vol 7 (3) ◽  
pp. p1
Author(s):  
Mehdi Monadjemi ◽  
John Lodewijks
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Purchasing Power ◽  
Impulse Response Functions ◽  
Power Parity ◽  
Long Run ◽  
Short Run ◽  
Relative Version ◽  
Relative Ppp ◽  
Exchange Rate Changes

Purchasing power parity (PPP) is an old and controversial proposition in economic literature. It is based on the law of one price, which argues that, after adjusting for the exchange rate, domestic and foreign price levels are equal. The relative version of PPP argues that exchange rate changes depend on the differential between domestic and foreign inflation rates. The absolute PPP version is based on restrictive assumptions that prevent it to hold in the short run. However, several studies support the validity of the relative PPP proposition in the long run. It is often observed that countries with persistently high inflation experience weak currencies. Our empirical testing using impulse response functions derived from a VAR model for eight countries provide mixed results. In six out of eight selected countries, relative PPP is supported by data in the long run.

Purchasing Power Parity (France and US)

2021 ◽  
Vol 8 (4) ◽  
pp. 514-528
Author(s):  
Ebtihal N Almutairi ◽  
Hind N Almutairi
Keyword(s):  
Purchasing Power Parity ◽  
Real Exchange Rates ◽  
Purchasing Power ◽  
Vector Autoregressive Model ◽  
Power Parity ◽  
Vector Autoregressive ◽  
Economic Concept ◽  
Price Indexes ◽  
Augmented Dickey Fuller ◽  
Short Run

Purchasing power parity is an important economic concept that presents a useful way of analyzing various currencies by comparing a similar basket of goods. Essentially, the concept of purchasing power parity (PPP) implies that the purchasing power parity will be same for two countries if their currencies fetch the same basket of goods, thereby allowing a measure to assess and compare different currencies. In order to test this concept and presence of purchasing power parity between countries, this essay aims to extend a statistical exercise for assessing the PPP for France and USA for both the long and short run. The data used is a monthly time series for the price indexes for France, US, and the nominal and real exchange rates. Keywords: Purchasing power parity; economic; Augmented Dickey Fuller; Fuller test; Vector autoregressive model

scholarly journals Testing for the Economic Impact of the U.S. Constitution: Purchasing Power Parity Across the Colonies versus Across the States, 1748–1811

2010 ◽  
Vol 70 (1) ◽  
pp. 118-145 ◽  
Author(s):  
Farley Grubb
Keyword(s):  
Economic Integration ◽  
Purchasing Power Parity ◽  
Free Market ◽  
Purchasing Power ◽  
Power Parity ◽  
Institutional Barriers ◽  
Legal Scholar ◽  
Short Run ◽  
British Colonies ◽  
The U.S

The U.S. Constitution removed real and monetary trade barriers between the states. By contrast, these states when they were British colonies exercised considerable real and monetary sovereignty over their borders. Purchasing power parity is used to measure how much economic integration between the states was gained in the decades after the Constitution's adoption compared with what existed among the same locations during the late colonial period. Using this measure, the short-run effect of the Constitution on economic integration was minimal. This may have been because the Constitution did not eliminate all the institutional barriers to interstate trade before 1812.“No idea is more firmly planted in American history than the idea that one of the most difficult problems during the Confederation was that of barriers to trade between state and state. There had been such barriers in colonial times …”Merrill Jensen1“The ‘secret’ of American economic growth, English legal scholar Sir Henry Maine wrote in 1886, lay in ‘the [constitutional] prohibition against levying duties on commodities passing from State to State … . It secures to the producer the command of a free market over an enormous territory of vast natural wealth …’”Charles W. McCurdy2

Purchasing Power Parity and the Law of One Price: Evidence from Commodity Prices in Asian Countries

2015 ◽  
Vol 15 (2) ◽  
pp. 231-240 ◽  
Author(s):  
Mohsen Bahmani-Oskooee ◽  
ABM Nasir
Keyword(s):  
Exchange Rates ◽  
Purchasing Power Parity ◽  
Real Exchange Rates ◽  
Strong Support ◽  
Commodity Prices ◽  
Law Of One Price ◽  
Purchasing Power ◽  
Power Parity ◽  
Industrial Countries ◽  
The Law

Almost all previous studies that have tested the law of one price or Purchasing Power Parity theory (PPP) have used either real effective exchange rates or bilateral real exchange rates which are constructed using CPI or PPI data. Most of these studies have failed to support the PPP mostly due to aggregation bias. A few recent studies, have, therefore used commodity prices in different countries and have provided strong support for the theory. These studies have mostly used data from industrial countries. In this paper, we use individual prices of 52 retail items from 15 cities in Asia and test for stationarity of the real exchange rate and speed of adjustment. We provide support for PPP in 63% of the cases. We also find that using individual prices lead to faster convergence of real rates toward their PPP values.

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.

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