PURCHASING POWER PARITY (PPP) BETWEEN CHINA AND THE U.S.: AN EMPIRICAL COMPARATIVE CASE STUDY

Abstract

 This study investigates the validity of Purchasing Power Parity (PPP) in explaining China's real exchange rate with regard to the US over the period 2000-2012. It applies traditional unit root tests, and the procedure developed by Zivot and Andrews and Lee-Strazicich to endogenously determine potential structural breaks. The results indicate that while the PPP hypothesis holds under China's former fixed (“pegged”) exchange regime, that, in the long run, it no longer holds under China's current managed floating exchange rate regime. In general, the findings lend support to the position that the exchange rate regime affects the validity of PPP theory for explaining exchange rates between countries.

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