Testing the Validity of Purchasing Power Parity in Emerging Market Economies

Year 2018, Issue: 637, 7 - 30, 01.03.2018

Faruk Mike

Abstract

In this study, the long-run validity of the purchasing power parity is tested by the real exchange rate model and the purchasing power parity (unconstrained form) model for 15 emerging market economies. For the exchange rate model, traditional and structural breakpoint unit root tests were applied for 2003Q1- 2015Q4 periods. For the purchasing power parity model, time series and panel data analysis were applied for both 2003Q1-20015Q4 quarterly and 2003-2015 yearly periods. Findings from the current study showed us that purchasing power parity generally were not valid in the fifteen developing economies for the studied terms. This suggests that relative price movements are not an effective policy instrument in determining the future values of exchange rates.

Keywords

Real Exchange Rate, Purchasing Power Parity, Time Series and Panel Data Analysis

Gelişen Piyasa Ekonomilerinde Satınalma Gücü Paritesinin Geçerliliğinin Test Edilmesi

Abstract

Bu çalışmada satınalma gücü paritesinin uzun dönemli geçerliliği 15 gelişen piyasa ekonomisi için reel döviz kuru modeli ve satınalma gücü paritesi modeli (kısıtsız form) ile test edilmektedir. Reel döviz kuru modeli için 2003Q1-2015Q4 çeyreklik dönemler itibariyle geleneksel ve yapısal kırılmalı birim kök testlerine, satınalma gücü paritesi modeli için 2003Q1-2015Q4 çeyreklik ve 2003-2015 yıllık dönemler itibariyle zaman serisi ve panel veri analizlerine yer verilmektedir. Çalışmadan elde edilen bulgular genel olarak satınalma gücü paritesinin 15 gelişen piyasa ekonomisi için geçerli olmadığına yöneliktir. Bu durum nispi fiyat hareketlerinin döviz kurlarının gelecek değerlerinin belirlenmesinde etkin bir politika aracı olmadığını ortaya koymaktadır.

Keywords

Reel Döviz Kuru, Satınalma Gücü Paritesi, Zaman Serisi ve Panel Veri Analizleri

References

• AHKING, Francis W.; (1990), “Further Results on Long-Run Purchasing Power Parity in the 1920s”, European Economic Review, 34, pp. 913-919.
• ANGELL, James W.; (1926), The Theory of International Prices: History, Criticism and Restatement, Harvard University Press, Cambridge.
• ASTERIOU, Dimitrios and Stephen G. HALL; (2011), Applied Econometrics, Second Edition, Palgrave MacMillan, UK.
• BALASSA, Bela; (1964), “The Purchasing-Power Parity Doctrine: A Reappraisal”, The Journal of Political Economy, 72(6), pp. 584-596.
• BASHER, Syed A. and Mohammed MOHSIN; (2004), “PPP Tests in Cointegrated Panels: Evidence from Asian Developing Countries”, Applied Economics Letters, 11, pp. 163–166.
• BUNTING, Frederick H.; (1939), “The Purchasing Power Parity Theory Reexamined”, Southern Economic Journal, 5(3), pp. 282-301.
• CERRATO, Mario and Nicholas SARANTIS; (2007), “Does the Purchasing Power Parity Hold in Emerging Markets? Evidence from A Panel of Black Market Exchange Rates”, International Journal of Finance & Economics, 12(4), pp. 427-444.
• CHANG, Tsangyao and Han-Wen TZENG; (2013), “Purchasing Power Parity in Nine Transition Countries: Panel Surkss Test”, International Journal of Finance Economics, 18, pp. 74–81.
• CHANG, Tsangyao, Wen-Chi LIU, Han-Wen TZENG and ChinPing YU; (2010), “Purchasing Power Parity for G-7 Countries: Panel SURADF Tests”, Applied Economics Letters, 17, pp. 1223–1228.
• CHEUNG, Yin-Wong and Kon S. LAI; (1993a), “Long-Run Purchasing Power Parity During the Recent Float”, Journal of International Economics, 34, pp. 181-192.
• CHEUNG, Yin-Wong and Kon S. LAI; (1993b), “Finite-Sample Sizes of Johansen’s Likelihood Ratio Tests for Cointegration”, Oxford Bulletin of Economics and Statistics, 55(3), pp. 313- 328.
• CHOUDHRY, Taufiq, Robert MCNOWN and Myles WALLACE; (1991), “Purchasing Power Parity and the Canadian Float in the 1950s”. The Review of Economics and Statistics, 73(3), pp. 558-563.
• COPELAND, Laurence; (2005), Exchange Rates and International Finace, Fourth Edition, Bell & Bain Limited, England.
• CORBAE, D. and Sam OULIARIS; (1988), “Cointegration and Tests of Purchasing Power Parity”, The Review of Economics and Statistics, 70(3), pp. 508-511.
• DICKEY, David A.and Wayne A. FULLER; (1981), “Likelihood Ratio Statistics for Autoregressive Time Series with A Unit Root”, Econometrica, 49(4), pp. 1057-1072.
• DOĞANLAR, Murat; (1999), “Testing Long-Run Validity of Purchasing Power Parity for Asian Countries”, Applied Economics Letters, 1999, 6, pp. 147-151
• DOĞANLAR, Murat; (2006), “Long-Run Validity of Purchasing Power Parity and Cointegration Analysis for Central Asian Countries”, Applied Economics Letters, 13, pp. 457-461.
• DOĞANLAR, Murat, Harun BAL and Mehmet ÖZMEN; (2009), “Testing Long-Run Validity of Purchasing Power Parity for Selected Emerging Market Economies” Applied Economics Letters, 16, pp. 1443-1448.
• DORNBUSCH, Rudiger; (1978), “Monetary Policy Under Exchange Rate Flexibility”, Working Paper, MIT Cambridge, pp. 1-58.
• DORNBUSCH, Rudiger; (1985), “Purchasing Power Parity”, NBER Working Paper Series, No. 1591, pp. 1-34.
• DUNN, Jr. Robert M. and John H. MUTTI; (2000), International Economics, Fifth Edition, Routledge, London.
• EDISON, Hali J.; (1985), “Purchasing Power Parity: A Quantitative Reassessment of the 1920s Experience”, Journal of International Money and Finance, 4, pp. 361-372.
• ENDERS, Walter; (1988), “Arima and Cointegration Tests of PPP Under Fixed and Flexible Exchange Rate Regimes”, The Review of Economics and Statistics, 70(3), pp. 504-508.
• ERLAT, Haluk; (2003), “The Nature of Persistence in Turkish Real Exchange Rates”, Emerging Markets Finance and Trade, 39, pp. 70-97.
• FEENSTRA, Robert C. and Alan M. TAYLOR; (2008), International Economics, Third Edition, Worth Publisher, New York.
• FLEISSIG, Adrian R. and Jack STRAUSS; (2000), “Panel Unit Root Tests of Purchasing Power Parity for Price Indices”, Journal of International Money and Finance, 19, pp. 489–506.
• FRANKEL, Jeffrey A. and Andrew K. ROSE; (1996), “A Panel Project on Purchasing Power Parity: Mean Reversion within and Between Countries”, Journal of International Economics, 40, pp. 209-224.
• FRENKEL, Jacob A.; (1978), “Purchasing Power Parity: Doctrinal Perspective and Evidence from the 1920s”, Journal of International Economics, 8, pp.169-191.
• FRENKEL, Jacob A.; (1980), “The Collapse of Purchasing Power Parities During the 1970s”, NBER Working Paper Series, No. 569, pp. 1-19.
• GAILLIOT, Henry J.; (1970), “Purchasing Power Parity as An Explanation of Long-Term Changes in Exchange Rates”, Journal of Money, Credit and Banking, 2(3), pp. 348-357.
• GANDOLFO, Giancarlo; (2002), International Finance and Open Economy Macro-Economics, Springer-Verlag, New York.
• GLEN, Jack D.; (1992), “Real Exchange Rates in the Short, Medium, and Long Run”, Journal of International Economics, 33, pp. 147-166.
• GULOGLU, Bulent, Serdar ISPIRA and Deniz OKAT; (2011), “Testing the Validity of Quasi PPP Hypothesis: Evidence from A Recent Panel Unit Root Test with Structural Breaks”, Applied Economics Letters, 18, pp. 1817–1822.
• GÜNEY, Pelin Ö., Erdinç TELATAR and Mübariz HASANOV; (2012). “Re-Examining Purchasing Power Parity for Selected Emerging Markets and African Countries”, Applied Economics Letters, 19, pp. 139-144.
• HABERLER, Gottfried; (1961), “A Survey of International Trade Theory”, Special Papers in International Economics, No. 1, Princeton University, pp. 1-78.
• HABERMEIER, Karl, Annamaria KOKENYNE, Romain VEYRUNE and Harald ANDERSON; (2009), “Revised System for the Classification of Exchange Rate Arrangements”, IMF Working Paper, pp. 1- 18.
• HAKKIO, Craig S.; (1984), “A Re-Examination of Purchasing Power Parity: A Multi-Country and Multi-Period Study”, Journal of International Economics, 17, pp. 265-277.
• HALL, Stephen G.; (1991), “The Effect of Varying Length Var Models on the Maximum Likelihood Estimates of Cointegrating Vectors”, Scottish Journal of Political Economy, 38(4), pp. 317-323.
• HOLMES, James M.; (1967), “The Purchasing-Power-Parity Theory: In Defense of Gustav Cassel as A Modern Theorist”, Journal of Political Economy, 75, (5), pp. 686-695.
• HUANG, Chao-Hsi and Chih-Yuan YANG; (2015), “European Exchange Rate Regimes and Purchasing Power Parity: An Empirical Study on Eleven Eurozone Countries” International Review of Economics and Finance, 35, pp. 100–109.
• HUIZINGA, John; (1987), “An Empirical Investigation of the Long-Run Behaviour of Real Exchange Rates”, CarnegieRochester Conference Series on Public Policy, 27, pp. 149- 214.
• JIANG, Chun, Na JIAN, Tie-Ying LIU and Chi-Wei SU; (2016), “Purchasing Power Parity and Real Exchange Rate in Central Eastern European Countries” International Review of Economics and Finance, 44, pp. 349–358.
• JOHANSEN, Soren; (1988), “Statistical Analysis of Cointegration Vectors”, Journal of Economic Dynamics and Control, 12, pp. 231-254.
• KALYONCU, Hüseyin; (2009), “New Evidence of the Validity of Purchasing Power Parity from Turkey”, Applied Economics Letters, 2009, 16, pp. 63–67.
• KARAGÖZ, Kadir and T. Bahadır SARAÇ; (2015), “Testing the Validity of PPP Theory for Turkey: Nonlinear Unit Root Testing”, Procedia Economics and Finance, 38, pp. 458-467.
• KEYNES, John M.; (1924), A Tract on Monetary Reform, MacMillan and Co., Limited, London.
• KIM, Yoonbai; (1990), “Purchasing Power Parity in the Long Run: A Cointegration Approach”, Journal of Money, Credit and Banking, 22(4), pp. 491-503.
• KIM, Hyung-Gun and Sang Y. JEI; (2013), “Empirical Test for Purchasing Power Parity Using A Time-Varying Parameter Model: Japan and Korea Cases”, Applied Economics Letters, 20, pp. 525–529.
• KRUGMAN, Paul R.and Maurice OBSTFELD; (2009), International Economics: Theory & Policy, Eighth Edition, Pearson Education, Inc., Boston.