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PURCHASING POWER PARITY IN CHINA: AN EMPIRICAL INVESTIGATION BASED ON BOOTSTRAP ROLLINGWINDOW TEST

Kai-Hua Wang, Chi-Wei Su (), Hsu-Ling Chang, Ji Ma and Cristina Iovu
Additional contact information
Kai-Hua Wang: Department of Finance, Ocean University of China, Qingdao, Shandong, China, 266100
Chi-Wei Su: Department of Finance, Ocean University of China, Qingdao, Shandong, China, 266100
Hsu-Ling Chang: Department of Accounting and Information, Ling Tung University.
Ji Ma: Department of Finance, Ocean University of China, Qingdao, Shandong, China, 266100.
Cristina Iovu: Bucharest Academy of Economic Studies, Romania.

Journal for Economic Forecasting, 2017, issue 4, 166-181

Abstract: This paper aims to assess whether the purchasing power parity (PPP) holds by examining the dynamic link between nominal exchange rate (NER) and relative consumer price (RCP) in China. Because of existing economic transitions and structural breaks, we discover that there is no relationship between NER and RCP to support the PPP by using full sample data. Hence, we employ the rolling window causality method to reexamine the causal relation and the results show that PPP sets up only for a short period of time. Exchange rate reform, trade cost, restrictions and imperfect competition can be utilized to explain the deviations in most time of the sample. Therefore, this empirical result has important implications for stakeholders to distinguish` factors that bring about the PPP deviations and further offers policy suggestions for the Chinese monetary authority.

Keywords: Consumer Price Index; exchange rate; rolling window; bootstrap; timevarying causality (search for similar items in EconPapers)
JEL-codes: C32 E31 F31 (search for similar items in EconPapers)
Date: 2017
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