Price Regulation, Exchange Rate Regulation and the Purchasing Power Parity: Empirical Evidence from China

Hongpian Jie and Xiaohui Liu

Emerging Markets Finance and Trade, 2024, vol. 60, issue 7, 1537-1548

Abstract: This paper compiles a market-based price index by accounting for the impact of price regulation. We then use the parallel market exchange rate and market-based price index to test Purchasing Power Parity (PPP) over a more extended period (1952–2019) in China. We find weak evidence support PPP when official data are used. However, we fail to find evidence against PPP when the parallel market exchange rate and the market-based price index are used. Moreover, the half-life of the RMB real exchange rate is approximately one year, substantially lower than the consensus estimates of 3–5 years.

Date: 2024
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DOI: 10.1080/1540496X.2023.2281414

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