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David H. Papell - One of the best experts on this subject based on the ideXlab platform.
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Purchasing Power Parity and country characteristics evidence from panel data tests
Journal of Development Economics, 2007Co-Authors: Joseph D Alba, David H. PapellAbstract:Abstract We examine long-run Purchasing Power Parity (PPP) using panel data methods to test for unit roots in US dollar real exchange rates of 84 countries. We find stronger evidence of PPP in countries more open to trade, closer to the United States, with lower inflation and moderate nominal exchange rate volatility, and with similar economic growth rates as the United States. We also show that PPP holds for panels of European and Latin American countries, but not for African and Asian countries. Our findings demonstrate that country characteristics can help explain both adherence to and deviations from long-run PPP.
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additional evidence of long run Purchasing Power Parity with restricted structural change
Journal of Money Credit and Banking, 2006Co-Authors: David H. Papell, Ruxandra ProdanAbstract:We investigate two alternative versions of Purchasing Power Parity (PPP): reversion to a constant mean in the spirit of Cassel and reversion to a constant trend in the spirit of Balassa and Samuelson, using long-span real exchange rate data for industrialized countries. We develop unit root tests that both account for structural change and maintain a long-run mean or trend. With conventional tests, previous research finds evidence of some variant of PPP for 9 of the 16 countries. With the unit root tests in the presence of restricted structural change, we find evidence of PPP for five additional countries.
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the Purchasing Power Parity puzzle is worse than you think
Empirical Economics, 2005Co-Authors: Christian J Murray, David H. PapellAbstract:The ‘‘Purchasing Power Parity puzzle’’ is the difficulty of reconciling very high short-term volatility of real exchange rates with very slow rates of mean reversion. The strongest evidence of slow mean reversion comes from least squares estimates of first-order autoregressive models of the long-horizon dollar-sterling real exchange rate. Using median-unbiased estimation methods, we show that these methods underestimate the half-lives of PPP deviations, and thus overestimate the speed of mean reversion. When the specification is amended to allow for serial correlation, the speed of mean reversion falls even further. This makes resolution of the Purchasing Power Parity puzzle more problematic.
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do panels help solve the Purchasing Power Parity puzzle
Journal of Business & Economic Statistics, 2005Co-Authors: Christian J Murray, David H. PapellAbstract:Although Rogoff described the “remarkable consensus” of 3- to 5-year half-lives of Purchasing Power Parity (PPP) deviations among studies using long-horizon data, recent works using panel methods with post-1973 data report shorter half-lives of 2 to 2.5 years. But these studies do not use appropriate techniques to measure persistence. We extend median-unbiased estimation methods to the panel context, calculate both point estimates and confidence intervals, and provide strong evidence confirming Rogoff's original claim. Although panel regressions provide more information on the persistence of real exchange rate shocks than univariate regressions, they do not help solve the PPP puzzle.
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state of the art unit root tests and Purchasing Power Parity
Journal of Money Credit and Banking, 2005Co-Authors: Claude Lopez, Christian J Murray, David H. PapellAbstract:Although the question of whether Purchasing Power Parity (PPP) holds in the long run has been extensively studied, the answer is still controversial. Some of the strongest evidence is provided by Taylor (2002), who concludes that long-run PPP held over the twentieth century. We argue that this conclusion is quite sensitive to the use of sub-optimal lag selection in unit root tests. Using superior lag selection methods, we find that long run PPP held for the real exchange rates of only 9 out of the 16 industrialized countries in Taylor's sample with the U.S. dollar as the base currency.
Mark P. Taylor - One of the best experts on this subject based on the ideXlab platform.
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real exchange rates and Purchasing Power Parity mean reversion in economic thought
Applied Financial Economics, 2006Co-Authors: Mark P. TaylorAbstract:This study provides a critical review of the research literature on long-run Purchasing Power Parity and the stability of real exchange rates.
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Purchasing Power Parity and the theory of general relativity the first tests
Journal of International Money and Finance, 2005Co-Authors: Jerry Coakley, Robert P Flood, Ana M Fuertes, Mark P. TaylorAbstract:We implement novel tests of general relative Purchasing Power Parity (PPP), defined as a long-run unit elasticity of the nominal exchange rate with respect to relative national prices, allowing for potentially permanent real exchange rate shocks. The finite-sample properties of the estimators used are analyzed through Monte Carlo analysis, allowing for country heterogeneity, cross-sectional dependence and non-stationary disturbances. Application to panel data sets of industrialized and developing economies reveals that inflation differentials are on average reflected one-for-one in long-run nominal exchange rate depreciation—i.e. that general relative PPP holds.
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the Purchasing Power Parity debate
Journal of Economic Perspectives, 2004Co-Authors: Mark P. Taylor, Alan M TaylorAbstract:Originally propounded by the 16th-century scholars of the University of Salamanca, the concept of Purchasing Power Parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it first was advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a deeper understanding of how well PPP applies in both the short run and the long run. Since the mid 1990s, larger datasets and nonlinear econometric methods, in particular, have improved estimation. As deviations narrowed between real exchange rates and PPP, so did the gap narrow between theory and data, and some degree of confidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP now enjoys perhaps its strongest support in more than 30 years, a distinct reversion in economic thought.
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the Purchasing Power Parity debate
Research Papers in Economics, 2004Co-Authors: Alan M Taylor, Mark P. TaylorAbstract:Originally propounded by the sixteenth-century scholars of the University of Salamanca, the conceptof Purchasing Power Parity (PPP) was revived in the interwar period in the context of the debateconcerning the appropriate level at which to re-establish international exchange rate parities.Broadly accepted as a long-run equilibrium condition in the post-war period, it first was advocatedas a short-run equilibrium by many international economists in the first few years following thebreakdown of the Bretton Woods system in the early 1970s and then increasingly came under attackon both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, overthe last three decades, a large literature has built up that examines how much the data deviated fromtheory, and the fruits of this research have provided a deeper understanding of how well PPP appliesin both the short run and the long run. Since the mid 1990s, larger datasets and nonlineareconometric methods, in particular, have improved estimation. As deviations narrowed between realexchange rates and PPP, so did the gap narrow between theory and data, and some degree ofconfidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP nowenjoys perhaps its strongest support in more than thirty years, a distinct reversion in economic thought.
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Purchasing Power Parity
Review of International Economics, 2003Co-Authors: Mark P. TaylorAbstract:The paper provides a selective and critical review of the literature on Purchasing Power Parity and real exchange rates, with special reference to the literature of the last two decades.
Kon S Lai - One of the best experts on this subject based on the ideXlab platform.
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on the Purchasing Power Parity puzzle
Journal of International Economics, 2000Co-Authors: Yinwong Cheung, Kon S LaiAbstract:Abstract A puzzle concerning Purchasing Power Parity is examined: Although the immense exchange rate volatility suggests a likely major role of nominal shocks under sticky prices, the observed half-life persistence of the real exchange rate seems excessively high to be rationalized by price stickiness. This study analyzes carefully the adjustment dynamics of real exchange rates through impulse response analysis. Half-life estimates are found to have substantial imprecision. Moreover, the dynamic response pattern suggests that the shock response is initially amplified before dissipating and that such non-monotonic dynamics can contribute to more than one-third of the observed persistence of real exchange rates.
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Purchasing Power Parity under the european monetary system
Journal of International Money and Finance, 1995Co-Authors: Yinwong Cheung, Hunggay Fung, Kon S LaiAbstract:Abstract Using reduced rank cointegration analysis, this study examines whether exchange rate realignments are effective in extenuating the deviations from Purchasing Power Parity (PPP) under the European Monetary System (EMS). In contrast to previous studies, more positive evidence for the PPP hypothesis is found. The difference in findings can be attributed partly to the statistical technique used, the correction of the finite sample bias, and the adjustment for realignment effects. In general, the results of this study support that currency realignments of the EMS have been effective in maintaining PPP among its member countries.
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long run Purchasing Power Parity during the recent float
Journal of International Economics, 1993Co-Authors: Yinwong Cheung, Kon S LaiAbstract:Abstract This paper examines the relevance of long-run Purchasing Power Parity (PPP), which allows for measurement errors, during the recent floating exchange rate period. Previous empirical studies generally fail to find support for long-run PPP over this period. In this paper. In this paper the cointegration property of exchange rates and prices is examined using maximum likelihood procedure, and we find significant evidence favorable to long-run PPP. Further tests for symmetry and proportionality indicate that these two conditions are not generally with the data. The results support the hypothesis of long-run PPP with measurement errors in prices.
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a fractional cointegration analysis of Purchasing Power Parity
Journal of Business & Economic Statistics, 1993Co-Authors: Yinwong Cheung, Kon S LaiAbstract:A generalized notion of cointegration, called fractional cointegration, is introduced to examine the long-run Purchasing Power Parity (PPP) hypothesis. By allowing deviations from equilibrium to follow a fractionally integrated process, the fractional cointegration analysis can capture a wider range of mean-reversion behavior than standard cointegration analyses. This gain is flexibility in modeling subtle mean-reverting dynamics is found to be important for a proper evaluation of long-run PPP. Empirical results based on historical data for the 1914–1989 period show that PPP reversion exists and can be characterized by a fractionally integrated process in three out of five countries studied. The results support PPP as a long-run phenomenon, though significant short-run deviations from PPP can exist.
Barbara Rossi - One of the best experts on this subject based on the ideXlab platform.
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confidence intervals for half life deviations from Purchasing Power Parity
Journal of Business & Economic Statistics, 2005Co-Authors: Barbara RossiAbstract:Existing point estimates of half-life deviations from Purchasing Power Parity (PPP), around 3–5 years, suggest that the speed of convergence is extremely slow. This article assesses the degree of uncertainty around these point estimates by using local-to-unity asymptotic theory to construct confidence intervals that are robust to high persistence in small samples. The empirical evidence suggests that the lower bound of the confidence interval is between four and eight quarters for most currencies, which is not inconsistent with traditional price-stickiness explanations. However, the upper bounds are infinity for all currencies, so we cannot provide conclusive evidence in favor of PPP either.
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confidence intervals for half life deviations from Purchasing Power Parity
Journal of Business & Economic Statistics, 2005Co-Authors: Barbara RossiAbstract:According to the Purchasing Power Parity (PPP) theory, real exchange rate fluctuations are mainly caused by transitory shocks. The theory fits well one empirical feature of the data, namely the short-run volatility of real exchange rates, but also implies that shocks should die away in one to two years (the time interval compatible with price and wage stickiness). Existing point estimates of half-life deviations from PPP are in the order of 3 to 5 years, too big to be reconciled with the PPP. The scope of this paper is to assess how much uncertainty there is around these point estimates. We construct confidence intervals that are robust to high persistence in the presence of small sample sizes. The empirical evidence suggests that the lower bound of the confidence interval is around 4 to 6 quarters for most currencies. With a few exceptions, the results show that the data are not inconsistent with the PPP theory, although we cannot provide conclusive evidence in favor of PPP either.
Alan M Taylor - One of the best experts on this subject based on the ideXlab platform.
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the Purchasing Power Parity debate
Journal of Economic Perspectives, 2004Co-Authors: Mark P. Taylor, Alan M TaylorAbstract:Originally propounded by the 16th-century scholars of the University of Salamanca, the concept of Purchasing Power Parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it first was advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a deeper understanding of how well PPP applies in both the short run and the long run. Since the mid 1990s, larger datasets and nonlinear econometric methods, in particular, have improved estimation. As deviations narrowed between real exchange rates and PPP, so did the gap narrow between theory and data, and some degree of confidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP now enjoys perhaps its strongest support in more than 30 years, a distinct reversion in economic thought.
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the Purchasing Power Parity debate
Research Papers in Economics, 2004Co-Authors: Alan M Taylor, Mark P. TaylorAbstract:Originally propounded by the sixteenth-century scholars of the University of Salamanca, the conceptof Purchasing Power Parity (PPP) was revived in the interwar period in the context of the debateconcerning the appropriate level at which to re-establish international exchange rate parities.Broadly accepted as a long-run equilibrium condition in the post-war period, it first was advocatedas a short-run equilibrium by many international economists in the first few years following thebreakdown of the Bretton Woods system in the early 1970s and then increasingly came under attackon both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, overthe last three decades, a large literature has built up that examines how much the data deviated fromtheory, and the fruits of this research have provided a deeper understanding of how well PPP appliesin both the short run and the long run. Since the mid 1990s, larger datasets and nonlineareconometric methods, in particular, have improved estimation. As deviations narrowed between realexchange rates and PPP, so did the gap narrow between theory and data, and some degree ofconfidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP nowenjoys perhaps its strongest support in more than thirty years, a distinct reversion in economic thought.
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a century of Purchasing Power Parity
The Review of Economics and Statistics, 2002Co-Authors: Alan M TaylorAbstract:This paper investigates Purchasing-Power Parity (PPP) since the late nineteenth century. I collected data for a group of twenty countries over 100 years, a larger historical panel of annual data than has ever been studied. The evidence for long-run PPP is favorable using recent multivariate and univariate tests of higher Power. Residual variance analysis shows that episodes of floating exchange rates have generally been associated with larger deviations from PPP, as expected; this result is not attributable to significantly greater persistence (longer half-lives) of deviations in such regimes, but is due to the larger shocks to the real exchange rate process in such episodes. In the course of the twentieth century, there was relatively little change in the capacity of international market integration to smooth out real exchange rate shocks. Instead, changes in the size of shocks depended on the political economy of monetary and exchange rate regime choice under the constraints imposed by the trilemma.
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a century of Purchasing Power Parity
National Bureau of Economic Research, 2000Co-Authors: Alan M TaylorAbstract:This paper investigates Purchasing-Power Parity (PPP) since the late nineteenth century. I collected data for a group of twenty countries over one hundred years, a larger historical panel of annual data than has ever been studied before. The evidence for long-run PPP is favorable using recent multivariate and univariate tests of higher Power. Residual variance analysis shows that episodes of floating exchange rates have generally been associated with larger deviations from PPP, as expected; this result is not attributable to significantly greater persistence (longer halflives) of deviations in such regimes, but is due to the larger shocks to the real-exchange rate process in such episodes. In the course of the twentieth century there was relatively little change in the capacity of international market integration to smooth out real exchange rate shocks. Instead, changes in the size of shocks depended on the political economy of monetary and exchange-rate regime choice under the constraints imposed by the trilemma.
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international capital mobility in history Purchasing Power Parity in the long run
National Bureau of Economic Research, 1996Co-Authors: Alan M TaylorAbstract:This paper investigates Purchasing-Power Parity (PPP) since the late nineteenth century for a sample of twenty countries, a broader sample of pooled annual data than has been studied before. Econometric results for time-series and panel samples allows us to test the robustness of the PPP hypothesis in different eras: the gold-standard, interwar, Bretton Woods, and the recent float. The evidence for PPP is mixed: Strong PPP, entailing stationarity of the real exchange rate, is not broadly supported, and real-exchange-rate dispersion shows counterintuitive historical patterns. However, not-much-weaker forms of PPP can be supported, with evidence of cointegration between different countries' common-currency price levels. Residual variances here confirm the conventional wisdom that the interwar period, particularly the Great Depression, represented the nadir of international capital market integration in the modern era.
