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The present paper exploits the idea that empirical estimates of the long-run PPP relationship may compound two distract influences coming from the behavior of market participants and policy makers when the latter are targeting the exchange rate. This tends to bias tests of longrun PPP against its acceptance. The validity of the theoretical arguments is assessed by drawing on the experience of two European Union countries, Greece and France, for the post-Bretton Woods period. Estimation biases due to the omission of policy effects are found to be significant only in the case of Greece. For France, our test results provide evidence bearing on the effectiveness of the competitive disinflation strategy pursued by the French authorities. JEL classification: C32; F31; F33 Keywords: Long-run PPP; Exchange rate targeting; Intervention policy; Multivariate cointegration

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 (The Review of Economics and Statistics 84 [2002] 139-150), who concludes that longrun PPP held over the 20th 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 curt-ency. JEL Codes: C22, F31 Keywords: Purchasing power parity, unit root tests, lag selection., THE QUESTION OV whether Purchasing Power Parity (PPP) holds in the long run has been the subject of voluminous research. Some of the strongest evidence of long-run PPP is provided [...]

This paper reexamines the issue of long-run PPP using multiple panel tests in the framework of confirmatory analysis. Application of six panel tests under competing null hypotheses to the real exchange rates of 21 industrial countries yields seemingly contradictory evidence on the parity during the post-Bretton Woods period. Regardless of numeraire currency, four I(1) panel tests unanimously reject the null hypothesis in favor of long-run PPP, whereas two I(0) panel tests lend little support to the parity at conventional significance levels. Confirmatory analysis suggests that this puzzling result can be explained either by nonlinear dynamics of the real exchange rates or by a mixture of I(0) and I(1) series in the panel. Monte Carlo experiments indicate that potential mix of I(0) and I(1) series is more relevant to the empirical finding. The use of a sequential classification method sorts out six real exchange rates which exhibit most persistent deviations from long-run equilibrium. Systematic behavior of these series can be characterized better by country specific factors than by observable macroeconomic variables. JEL classification: C32; F31; F47 Keywords: PPP; Panel unit-root tests; Confirmatory analysis; Mixed panel; Sequential classification method

Despite two decades of implementing economic reforms, there is still a significant gap between official and black market exchange rates in Africa. African policy makers continue to implement exchange rate policies based largely on the assumption that purchasing power parity (PPP) holds. This paper examines whether there is empirical support for PPP in Africa. We used Johansen's cointegration technique and error correction modeling on annual data for black market exchange rates and CPI in 30 countries covering 1960-97. We found strong support for the PPP doctrine as a useful guide for exchange rate policy reform in Africa. Key words--African countries, black market exchange rates, cointegration tests, PPP

Rogoff suggested in 1996 that the dollar-yen real exchange rate represented a 'canonical' case of a trend in the equilibrium real exchange rate. The implied speed of adjustment of the dollar-yen real exchange rate is found to be substantially faster, with half-life shocks of less than 2 years, from estimates of a non-linear model which incorporates a deterministic trend proxying the equilibrium level. We also examine the power of unit root tests against smooth transition non-linear models which incorporate a deterministic trend and the robustness of such non-linear estimations using Monte Carlo and bootstrap simulations.

We study the dispersion of absolute price levels for US cities since 1918. By absolute price levels, we mean price indices that measure the cost of a given consumption basket at each point in time. We find strong evidence that city price levels converge over time and that the dispersion of price levels is lower for US cities than between OECD countries. We argue that price level convergence for US cities will produce bilateral real exchange rate nonstationarity. In this case, however, nonstationarity is not evidence against Purchasing Power Parity (PPP), rather it is the consequence of improved market integration. JEL classification: F31; F41 Keywords: Purchasing power parity; Real exchange rates

This paper addresses the issue of using aggregate price indices for purchasing power parity (PPP) tests and the fitness of PPP as a model for exchange rate forecasting. Compared with consumer price index (CPI) and wholesale price index (WPI), the price index of traded-goods (TPI) appears to be a more appropriate price index for both PPP tests and exchange rate forecasting. It performs better in the tests and provides superior exchange rate forecasts, both within- and out-of-sample. While the half-life of the estimated deviations from PPP is about two years for the CPI and WPI-based real exchange rates, it is only one year for the TPI-based real exchange rates. JEL classification: C12; C22; C32; C53; E31; F30; F31; F47 Keywords: Purchasing power parity; Price indices; Exchange rate forecasts; Measurement errors; Half-life

Although there has been much recent work on purchasing power parity (PPP), neither univariate nor panel methods have produced strong rejections of unit roots in US dollar real exchange rates for industrialized countries during the post-1973 period. We investigate the hypothesis that these non-rejections can be explained by one episode, the large appreciation and depreciation of the dollar in the 1980s, by developing unit root tests which account for this event and maintain long-run PPP. Using panel methods, we can strongly reject the unit root null for those countries that adhere to the typical pattern of the dollar's rise and fall. Keywords: Purchasing power parity; Panel unit root tests; Structural change JEL classification: C23; F40

Doubts have been raised recently on the findings of panel studies of purchasing power parity (PPP) on the grounds that they ignore serial correlation and cross-sectional dependence, and consequently suffer from severe size biases and loss of power. We implement an alternative panel unit root test that controls for serial correlation and cross-sectional dependence as well as the heterogeneity of dynamics and error variances across groups, and find strong support for PPP Our findings are consistent with other recent studies on the subject.

This paper generalizes the existing cointegration analysis literature in two respects. Firstly, the problem of efficient estimation of vector error correction models containing exogenous I(1) variables is examined. The asymptotic distributions of the (log-)likelihood ratio statistics for testing cointegrating rank are derived under different intercept and trend specifications and their respective critical values are tabulated. Tests for the presence of an intercept or linear trend in the cointegrating relations are also developed together with model misspecification tests. Secondly, efficient estimation of vector error correction models when the short-run dynamics may differ within and between equations is considered. A re-examination of the purchasing power parity and the uncovered interest rate parity hypotheses is conducted using U.K. data under the maintained assumption of exogenously given foreign and oil prices.

Recent tests using long data series find evidence in favor of long-ran PPP. These tests may have reached the wrong conclusion. Using artificial data calibrated to nominal exchange rates and disaggregated data on prices, we show that tests on long-ran PPP have serious size biases. In the baseline case, unit root and cointegration tests with a nominal size of 5% have true sizes that range from 0.90 to 0.99 in 100-year long data series, even though there is a permanent component that accounts for 42% of the 100-year forecast variance of the real exchange rate. Tests of stationarity are shown to have very low power in the same circumstances. Keywords: Cointegration; Purchasing power parity; Unit roots

A comparison of purchasing power parity for many member nations of the Organization for Economic Cooperation and Development over 170 years produces appropriate comparisons of welfare and productivity. This new examination shows earlier US leadership and closer positions between France and Britain in the 19th century.

Updating Bilson's (1984) investment strategy using an out-of-sample forecast procedure, we find much smaller profits from a trading strategy based on purchasing power parity. Though the total profit is significant at a 5 percent level, it is substantially lower than what Bilson found. Our results suggest Bilson's excess profits are due to the sample of data used and the in-sample nature of the tests. Hence, this paper demonstrates that the simple investment strategy leads to the same conclusion that econometric testing does; namely, that purchasing power parity is only marginally useful in forecasting exchange rates., INTRODUCTION The theory of purchasing power parity (PPP) states that the exchange rate between two currencies is related to the relative prices in the two countries so that exchange rate-adjusted [...]

A random bidding model formulated by B. Ellickson is compared to a previously proposed standard hedonic model to ascertain benefits resulting from marginal and non-marginal willingness-to-pay (WTP) changes in housing attributes by household type in the residential market of the Chicago Primary Metropolitan Statistical Area including Cook and DuPage counties. Both models are based on the hypothesis of utility maximization. Results indicate that WTP estimates derived from both models are quite close. The random bidding model is a better model to use to derive benefits associated with various sections of the population characterized by socio-economic attributes, with the effect of categorization on benefit estimates as a whole being negligible.

Substantial deviations, between most countries, from the purchasing power parity seem to be at least as determined as small deviations, may be even more so. The exceptions are found in several intra-EC real exchange rates. The significance is that market hostilities alone do not account for the highly unrealistic nature of purchasing power parity.

Evidence versus the unit root null, and hence in favor of purchasing power parity (PPP), does rise as the extent of the data increases. The bolstering of the evidence of PPP is equally stronger when the German mark, instead of the US dollar, is utilized as the base currency. The rejections of the unit root null do not exclusively rise as the sample size grows.

There is substantial proof for purchasing power parity, though not to the same magnitude as for all currencies. Evidence supporting the purchasing power parity is most marked for numerous exchange rates in connection to the Dmark, and weakest for the Japanese yen. Under the methodology used, results are invariant to the selection of a standard on numeraire currency.

The Big Mac Index is considered a more effective international monetary standard as research shows it is exact in monitoring exchange rates over the long-term, which is constant with earlier purchasing power parity (PPP) findings. Notwithstanding the Big Mac's flexibility, it can still be improved by considering the presence of productivity slant between countries.

Using panel data methods, we investigate long-run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float. The evidence against the unit root hypothesis is stronger for larger than for smaller panels, for monthly than for quarterly data, and when the German mark, rather than the United States dollar, is used as the base currency. While we find that accounting for serial correlation considerably weakens the evidence against the unit root null, the results as a whole are consistent with long-run purchasing power parity. Keywords: Purchasing power parity; Real exchange rates; Unit roots; Panel data model

Most empirical studies for the post Bretton-Woods period fail to find evidence of a long-run Purchasing Power Parity (PPP) relationship. An investigation into the failure of PPP is made in this study by using disaggregated price data. This disaggregation is on two levels: location (prices from US and Canadian cities rather than national aggregates) and type of goods (e.g., fuel oil, a tradable commodity and local public transportation, a non-tradable). This disaggregation allows for the testing of the importance of borders (implying an exchange rate), distances, and types of goods in the failure of PPP. The analysis conducted suggests that both country borders and distances play a significant role. However, there is mixed evidence concerning type of goods as an important determinant of the failure of PPP., Studies on long-run Purchasing Power Parity (PPP) in industrialized nations show that the relationship is not exhibited in the post Breton-Woods period. The causes of the failure of PPP in such situations is evaluated by using disaggregated price data. The studies of Rogers and jenkins (1995) and Johnson (1991) are furthered by continuing the disaggregation of price data to another level. Price data is broken down not just into different kinds of goods, but into cities within countries as well. Results reveal that country borders and distances do affect PPP but the effects of the types of goods is not as strongly established.

Constant price GDP measures are not true quantity indexes because they are prone to substitution bias and they distort income level measurements of convergence and divergence. The Ideal Afriat Index is proposed as a new multilateral index that establishes limits to the variance of true quantity indexes. Findings reveal that constant price indexes of GDP are inclined to misinterpret the measurement of convergence in true GDP with convergence in prices.

The results of a new study show that, on the basis of long-term average, the concept of purchasing power parity retains much empirical usefulness. That finding, while it does not conflict with the findings of studies of long historical time-series data, contradicts prevailing beliefs concerning the behavior of exchange rates during the current float.

The results of Monte Carlo experiments demonstrate that the low power of Johansen cointegration tests is largely responsible for the failure of most studies to provide evidence in support of purchasing power parity (PPP) in the era following the Bretton Woods agreement. A study using a testing procedure developed by M.T. Horvath and M.W. Watson has provided moderate support for PPP.

A study was conducted on G7 exchange rate deviations from purchasing power parity (PPP) since the demise of the Bretton Woods fixed exchange rate system. A model was constructed to incorporate traditional PPP and financial market variables and tested on the US dollar's six G7 exchange rates during the floating rate era. The results indicate that the divergent behavior of G7 exchange rates during the period can be explained by the model's common set of variables.

The validity of purchasing power parity in exchange rate determination was investigated through unit root tests of real exchange rates using panel data. Panel analysis was employed to raise the power of unit root tests. The results showed that evidence indicating PPP for countries belonging to the Group of Six and Organization for Economic Cooperation and Development was obtained for the flexible exchange rate period as the power of the unit test is increased.

Traded and nontraded productivity indicators are established for six countries belonging to the Organization for Economic Cooperation and Development. Johansen cointegration and hypotheses testing shows cointegration between local and foreign productivity differentials and real exchange rate. The rate exhibits a positive correlation with local productivity of traded products.

Previous time-series studies have shown evidence of mean-reversion in real exchange rates. Deviations from purchasing power parity (PPP) appear to have half-lives of approximately four years. However, the long samples required for statistical significance are unavailable for most currencies, and are potentially inappropriate because of regime changes. In this study, we re-examine deviations from PPP using a panel of 150 countries and 45 annual post WWII observations. Our panel shows strong evidence of mean-reversion that is similar to that from long time-series. PPP deviations are eroded at a rate of approximately 15% annually, i.e., their half-life is around four years. Such findings can be masked in time-series data, but are relatively easy to find in cross-sections. Key words: long-run; cross-section; time-series; real; exchange rate; inflation; variation

PURCHASING POWER PARITY (PPP) is one of the most important conditions in international finance because many models of exchange-rate determination are built on the assumption that it holds.(1) The PPP [...]

With transaction costs for trading goods, the nominal exchange rate moves within a band around the nominal purchasing power parity (PPP) value. We model the behavior of the band and of the exchange rate within the band. The model explains why there are below-unity- slope coefficients in regression tests of PPP, and why these increase toward unity under hyperinflation or with low-frequency data. Our results are independent of the presence of nontraded goods in the economy. (Reprinted by permission of the publisher.)

Exchange rate realignments under the European Monetary System (EMS) have been successful in maintaining purchasing power parity (PPP) among member countries. This was indicated by the results of a study which sought to investigate the effectivity of such realignments in maintaining competitiveness of EMS members. The findings contradict those of previous research which reject the empirical relevance of the PPP hypothesis.

This study tests the validity of ling-run PPP by applying the cointegration methodology of Johansen and Juselius (1990) to monthly exchange rate and price data for eleven countries. The results [...]

Excess returns to foreign exchange holdings are decomposed into component segment linked to interest rate parity deviations and purchasing power parity deviations. The latter are found to account for more than 80% of the variation in excess returns for the 15-year period 1974-89. The results confirm the view that interest rate parity deviations play but a small role in excess returns variation.

The law of one price is reviewed to test for its validity. The review was conducted by examining the non-stationarity of US prices of several classes of wheat traded in Japan, the Natherlands and the US. Results show that transport costs play a key role in allowing long-term cointegration to occur. Moreover, the results show that while short-term fluctuations in purchasing power parity occur, they do not provide profitable arbitrage positions.

The relative purchasing power parity hypothesis is tested on month-by-month, post-1972 data to obtain regression coefficients that are close to unity. The tests showed that a unit unexpected inflation differential tends to be associated with a unit unexpected change in the exchange rate. The results are consistent with the idea that errors-in-variables of the 'thin trading' type may be responsible for most of the poor performance of standard GLS or OLS regressions.

The Purchasing Power Parity theory concerning long-term economic equilibrium is valid. This was verified by an empirical analysis of the real exchange rate of eight Pacific Basin countries during the period 1974-1987. The study revealed the occurence of mean reversion of the real exchange rate. This contrast with results for industrialized countries are due to two factors, namely, the use of the black market rate and the relative openness of the eight economies.

Johansen's maximum likelihood approach for estimating steady-state relations in multivariate vector autoregressive models is used to examine the influence of long-term purchasing power parity in economies characterized by floating exchange rates. Quarterly data from seventeen OECD countries formed the basis of this examination. Results show that there is a long-term connection between exchange rates and international price differentials.

The association between the national price level (PL) and nontradables price (P) can be used to derive various purchasing power parity (PPP) indices. PPP is defined as an index of the prices of exportables, importables and nontraded goods. It was posited that a methodology using simultaneous equations computing for the relative prices of nontradables will result in a dependent variable which will provide an alternative econometric analysis of PL.

The doctrine of relative purchasing power parity was analyzed based on the quantity theory of money. Bilateral relative purchasing power parities between the US and Canada and between the US and Japan were also examined. Results showed that economic relations between the US and Canada and between the US and Japan are governed by the concept of the purchasing power parity. However, the parity did not hold true when the requisite smoothed time series were obtained through appropriate autoregressive integrated moving average filters and when cointegration techniques were employed.

With the development of cointegration technique, the Purchasing Power Parity (PPP) theory has received renewed attention. Most studies have tested the theory by using data from developed countries (DCs) and some high-inflation, less-developed countries (LDCs). They have mostly rejected its empirical validity. In this paper we use the concept of effective exchange rate and quarterly data over 1973-88 to examine the experience of 25 LDCs. For most countries we found little empirical support for the PPP.

An analysis of purchasingpower parity (PPP) under long-term equilibrium conditions is presented. The analysis focuses on the long-term relationship between exchange rates and wholesale price indices by applying cointegration tests. The method of testing varies from previous studies by including more precise data pretests and by eliminating the a priori conditions. It is shown that seven of the nine Swiss exchange rates exhibited cointegration.

The wide range of calorie-income elasticities in the literature results, in large part, from the particular calorie and income variables used for estimation. Elasticities across four estimation techniques and four calorie-income variable pairs for a sample of Philippine farm households, ranged from 0.03 to 0.59. Estimates associated with calorie availability are biased upwards, first, because random errors in measuring food purchases are transmitted (by construction) both to calorie availability and total expenditures, and second, because the residual difference between family calorie intake and household calorie availability will often increase with income. The calorie intake-total expenditure variable pair gives the preferred elasticity estimate in the 0.08-0.14 range.