Digging Out the PPP Hypothesis: an Integrated Empirical Coverage

Miguel de Carvalho () and Paulo Júlio

No 24, GEE Papers from Gabinete de Estratégia e Estudos, Ministério da Economia

Abstract: We use several popular tests to test the validity of the Purchasing Power Parity (PPP) hypothesis. In particular, we analyze four classes of tests { standard univariate unit root tests, co-integration, panel unit root tests and unit root tests for nonlinear frameworks {, for a dataset consisting of 20 bilateral exchange rates. Through this approach, we ascertain the e ectiveness of each methodology in assessing the validity of PPP. Overall, our results suggest little evidence to support PPP. Among the conducted tests, the panel analysis of nonstationarity idiosyncratic and common components provides the richest insights by disentangling the possible sources of non-stationarity of real exchange rates. The relevance of using price indexes with di erent characteristics is also pinpointed.

Keywords: PPP; Real exchange rate; Unit roots; Co-integration; Panel; Nonlinear models; Cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2010-09, Revised 2010-09
New Economics Papers: this item is included in nep-cba and nep-opm
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Journal Article: Digging out the PPP hypothesis: an integrated empirical coverage (2012)
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