On the Validity of Purchasing Power Parity: The Case of Sierra Leone

2020 ◽  
Vol 11 (1) ◽  
pp. 18 ◽  
Author(s):  
Mohamed JABBIE ◽  
Emerson Abraham JACKSON
Keyword(s):  
Exchange Rate ◽  
Error Correction ◽  
Sierra Leone ◽  
Purchasing Power Parity ◽  
The United States ◽  
Purchasing Power ◽  
Power Parity ◽  
Price Differential ◽  
Short Run ◽  
The Exchange Rate

This paper attempts to empirically validate the Purchasing Power Parity (PPP) theory in the context of Sierra Leone. To achieve this objective, cointegration and error correction techniques were utilized to account for both long and short-run dynamics over the period 2007Q1 to 2019Q1. The Engel-Granger cointegration technique was utilized to ascertain the long-run relationship between the exchange rate and the price differential between Sierra Leone and the United States of America, while the redundant variable test was used to attain the parsimonious short-run error correction model. The results indicated a cointegrating relationship, while the coefficient on the price differential was greater than one (1), reflecting that the PPP does not hold for Sierra Leone. Moreover, the short-run results showed a rejection of the theory and rather endorses the presence of depreciation inertia, where past depreciation of the exchange rate is a major determinant of its current depreciating trend.

scholarly journals Long-Run and Short-Run Dynamics of the Exchange Rate in Pakistan: Evidence From Unrestricted Purchasing Power Parity Theory

2008 ◽  
Vol 13 (1) ◽  
Author(s):  
Muhammad Arshad Khan ◽  
Abdul Qayyum Abdul Qayyum
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Nominal Exchange Rate ◽  
Purchasing Power ◽  
Power Parity ◽  
Speed Of Adjustment ◽  
Long Run ◽  
Short Run ◽  
The Exchange Rate ◽  
Long Run Equilibrium

The main focus of this paper is to measure the speed of adjustment of the exchange rate by means of the persistent profile approach developed by Pesaran and Shin (1996) to examine the symmetry and proportionality assumptions of the purchasing power parity (PPP) theory of exchange rates for the Pak-rupee vis-à-vis the US-dollar exchange rate over the period 1982Q2-2005Q4. Using cointegration and vector error-correction modeling approaches, we find considerable support for the validity of weak-form PPP in Pakistan. Furthermore, the symmetry and proportionality assumptions of PPP are not verified. In the short-run, the exchange rate and foreign prices play a significant role in the convergence process to achieve long-run equilibrium. However, the speed of adjustment is very slow and the persistence profiles suggest that almost 4-5 years are required to eliminate deviations and bring the nominal exchange rate in line with the long-run equilibrium path.

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 Identifying The Purchasing Power Parity of Indonesia Rupiah (IDR) based on BIG MAC Index

2016 ◽  
Vol 17 (2) ◽  
pp. 210
Author(s):  
Tongam Sihol Nababan
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Real Income ◽  
Purchasing Power ◽  
Power Parity ◽  
The Real ◽  
The People ◽  
The Usa ◽  
The Exchange Rate ◽  
Asean Countries

The aim of this study is to identify : (1) profile of exchange rate and purchasing power parity of IDR against US $ based on Big Mac Index compared to the exchange rate of other countries, and (2) the position of the Big Mac Affordability of  Indonesia compared to other ASEAN countries. The results showed that based on Big Mac index during the period April 1998 up to January 2015, IDR exchange rate tends to be undervalued against the USA dollar. The cause of the currency tends to be in a position of undervalued due to the components of non-tradable have not been included in Big Mac index. The index of Big Mac Affordability indicates that there is a great disparity of income between Singapore and five other ASEAN countries. The purchasing power of the real income of the people in Singapore is nearly five times the real income of the people in Indonesia.

scholarly journals Nonlinear Cointegration and Asymmetric Adjustment in Purchasing Power Parity of the USA, Germany, and Pakistan

Complexity ◽  
2021 ◽  
Vol 2021 ◽  
pp. 1-7
Author(s):  
Kashif Ali ◽  
Hafsa Hina ◽  
Muhammad Ijaz ◽  
Mahmoud El-Morshedy
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Purchasing Power ◽  
Power Parity ◽  
Asymmetric Adjustment ◽  
Long Run ◽  
Nominal Exchange Rates ◽  
Trading Partners ◽  
The Usa ◽  
The Exchange Rate

The current study explores nonlinear cointegration as well as asymmetric adjustment to investigate the long-run purchasing power parity in three major trading partners of Pakistan. The ESTAR and LSTAR models were used to investigate the behavior of the nominal exchange rates. The findings declared that series follows the nonlinear exchange rate. The asymmetric behavior of the exchange rate allows the threshold cointegration model to be implemented. In the case of Pakistan-China, the result suggests that long-run PPP holds. As a result, trading will be more profitable if the exchange rate is varied in relation to major trading partners rather than just the US dollar.

Study on the HMM of Nonlinear Nominal Exchange Rates

2011 ◽  
Vol 268-270 ◽  
pp. 1823-1827
Author(s):  
Shuo Zhang ◽  
Xiao Feng Hui
Keyword(s):  
Exchange Rate ◽  
Purchasing Power Parity ◽  
Nominal Exchange Rate ◽  
Statistical Characteristics ◽  
Rate Theory ◽  
Purchasing Power ◽  
Rate Model ◽  
Power Parity ◽  
Nominal Exchange Rates ◽  
The Exchange Rate

The exchange rate model for the study of the exchange rate theory has very important significance. After analyzing the successful nonlinear model of real exchange rate based on the purchasing power parity (PPP) theory, the nonlinear problem of nominal exchange rate is studied in this paper. Through a research on a period of nominal exchange rate with nonlinear characteristics, a nonlinear statistical model of nominal exchange rate based on the hidden Markov model (HMM) is proposed, and the parameters of the model are estimated. Hypothesis testing shows that the model can accurately describe the statistical characteristics of the nominal exchange rate time series. The parameters showed that the nominal exchange rate model proposed in this paper, to some extent, supports that deviations from purchasing power parity (PPP) are nonlinear mean reversions.

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