Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data (Subsequently published in "Applied Financial Economics", 16, 127-134, 2006. )

Pan A. Yotopoulos and Yasuyuki Sawada
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Pan A. Yotopoulos: University of Florence and (emeritus) Stanford University

No CARF-F-021, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: We formulate and implement a new empirical procedure to examine the validity of PPP in the long-run for 153 countries by using the familiar cross-country data set of Heston, Summers, and Aten (2002). Unlike the existing studies that rely on mean reversion of real exchange rates, we explicitly examine country-specificity in the deviations of the nominal exchange rate from PPP. We find, first, that out of a total of 153 countries, 132 countries have achieved PPP within twenty years, 1980-2000 and 105 countries have attained PPP over ten years, 1990-2000. Second, according to the results, our method can be accepted as a workable shortcut of the direct, fullinformation approach of Yotopoulos (1996) that tests for long-run PPP utilizing micro-ICP data. This becomes an important characteristic of this paper since comprehensive micro-ICP data are no longer easily available. As a by-product, of the empirical validation of our shortcut approach, our empirical results are in favor of the Ricardo-Balassa-Samuelson effect.

Pages: 24 pages
Date: 2005-02
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Citations: View citations in EconPapers (3)

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