Purchasing Power Parity: A Unit Root, Cointegration and VAR Analysis in Emerging and Advanced Countries

Georgios Loukopoulos and Dimitrios Antonopoulos ()

Business and Economic Research, 2015, vol. 5, issue 1, 262-279

Abstract: The purpose of this study is to investigate the validity of the absolute version of the purchasing power parity (PPP) of a sample of four advanced and four emerging countries covering the period from 1993 to 2014. To examine the existence of PPP we apply the Augmented Dickey-Fuller, DF-GLS and KPSS tests for non-stationarity, and the Johansen procedure for cointegration between exchange rates and consumer price indices. The impulse response function presents a graphical view which is consistent with impressions from the statistics of stationarity tests. We also employ the variance decomposition method to analyze the movements in the exchange rates and the price indices that are caused by their own shocks, and shocks caused by other variables. With respect to half-life estimates, the results from a shock to the real exchange rate range from 0.81 to 6.45 years (3.23 years on average). Overall, unit root tests show that absolute PPP may not hold, but this depends on the country and the selected method. In contrast, the Johansen approach does not support the existence of PPP for both developed countries and emerging market economies.

Keywords: Purchasing Power Parity; Exchange Rates; Time Series Econometrics (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.macrothink.org/journal/index.php/ber/article/view/7177/6291 (application/pdf)
http://www.macrothink.org/journal/index.php/ber/article/view/7177 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mth:ber888:v:5:y:2015:i:1:p:262-279

Access Statistics for this article

Business and Economic Research is currently edited by Daisy Young

More articles in Business and Economic Research from Macrothink Institute
Bibliographic data for series maintained by Technical Support Office ( this e-mail address is bad, please contact ).