IDEAS home Printed from https://ideas.repec.org/a/bpj/rmeecf/v2y2004i1n4.html
   My bibliography  Save this article

Purchasing Power Parity: Further Evidence and Implications

Author

Listed:
  • Hassanain K.

    (Department of Economics, UAE University)

Abstract

This study tests the validity of the purchasing power parity (PPP) theory using a panel of ten Arab countries. It also measures the speed of convergence for the panel and for the Gulf Cooperation Council (GCC), including Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates which follow a hard dollar peg. The test is conducted using nine base currencies. The main findings are first on the validity of PPP. (1) The null of unit root is rejected using each of the nine currencies as a numeraire--the result appears to be invariant to the choice of the base currency. (2) The result appears to be stronger when the estimation is based on heterogeneous rather than homogeneous serial correlations among panel units. Secondly, on persistence. (3) The estimated average half-life of a shock to the real exchange rate in the full panel is 2.19 years. (4) The study reveals that for the GCC economies deviation from PPP will be more persistent due to the hard peg, the dollar volatility and the weak goods market arbitrage. Clearly, the GCC countries will need to move to a more stable peg to be able to achieve the benefits they hope by engaging in a monetary union by 2010.

Suggested Citation

  • Hassanain K., 2004. "Purchasing Power Parity: Further Evidence and Implications," Review of Middle East Economics and Finance, De Gruyter, vol. 2(1), pages 61-75, April.
    • Handle: RePEc:bpj:rmeecf:v:2:y:2004:i:1:n:4
    DOI: 10.2202/1475-3693.1020
    as

    Download full text from publisher

    File URL: https://doi.org/10.2202/1475-3693.1020
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.2202/1475-3693.1020?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Papell, David H. & Theodoridis, Hristos, 1998. "Increasing evidence of purchasing power parity over the current float," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 41-50, February.
    2. McNown, Robert & S. Wallace, Myles, 1989. "National price levels, purchasing power parity, and cointegration: a test of four high inflation economies," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 533-545, December.
    3. Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August.
    4. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    5. Bahmani-Oskooee, Mohsen & Miteza, Ilir & Nasir, A. B. M., 2002. "The long-run relation between black market and official exchange rates: evidence from panel cointegration," Economics Letters, Elsevier, vol. 76(3), pages 397-404, August.
    6. Coakley, Jerry & Fuertes, Ana-Marie, 2000. "Is There a Base Currency Effect in Long-Run PPP?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(4), pages 253-263, October.
    7. MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January.
    8. Hakkio, Craig S. & Rush, Mark, 1991. "Cointegration: how short is the long run?," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 571-581, December.
    9. Shiller, Robert J. & Perron, Pierre, 1985. "Testing the random walk hypothesis : Power versus frequency of observation," Economics Letters, Elsevier, vol. 18(4), pages 381-386.
    10. Wu, Yangru, 1996. "Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 54-63, February.
    11. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November.
    12. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    13. Engle, R. F. & Granger, C. W. J. (ed.), 1991. "Long-Run Economic Relationships: Readings in Cointegration," OUP Catalogue, Oxford University Press, number 9780198283393.
    14. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    15. Papell, David H & Theodoridis, Hristos, 2001. "The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 790-803, August.
    16. Kuo, Biing-Shen & Mikkola, Anne, 2001. "How Sure Are We about Purchasing Power Parity? Panel Evidence with the Null of Stationary Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 767-789, August.
    17. Lothian, James R., 1998. "Some new stylized facts of floating exchange rates," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 29-39, February.
    18. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    19. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
    20. Bahmani-Oskooee, Mohsen, 1998. "Do exchange rates follow a random walk process in Middle Eastern countries?," Economics Letters, Elsevier, vol. 58(3), pages 339-344, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tsangyao Chang & Yu-Shao Liu & Chi-Wei Su, 2012. "Purchasing power parity with nonlinear and asymmetric smooth adjustment for the Middle Eastern countries," Applied Economics Letters, Taylor & Francis Journals, vol. 19(5), pages 487-491, March.
    2. Mohammed Ali, Khalifa, 2017. "Competitiveness and Economic Integration in IDB Member Countries," Working Papers 2017-1, The Islamic Research and Teaching Institute (IRTI).
    3. Khalifa Hassanain, 2017. "Stock Prices and Real Exchange Rate Movements in the Gulf Cooperation Council," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 92-96.
    4. Narayan Paresh K & Prasad Biman Chand, 2005. "The Validity of Purchasing Power Parity Hypothesis for Eleven Middle Eastern Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 3(2), pages 44-58, August.
    5. Mohsen Bahmani‐Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less‐Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. K. Hassanain, 2004. "Purchasing Power Parity And Cross‐Sectional Dependency," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 238-257, June.
    2. Cushman, David O. & Michael, Nils, 2011. "Nonlinear trends in real exchange rates: A panel unit root test approach," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1619-1637.
    3. Papell, David H., 2002. "The great appreciation, the great depreciation, and the purchasing power parity hypothesis," Journal of International Economics, Elsevier, vol. 57(1), pages 51-82, June.
    4. Kul B. Luintel, 2000. "Real exchange rate behaviour: evidence from black markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(2), pages 161-185.
    5. Maican, Florin G. & Sweeney, Richard J., 2013. "Real exchange rate adjustment in European transition countries," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 907-926.
    6. Choi, Chi-Young, 2004. "Searching for evidence of long-run PPP from a post-Bretton Woods panel: separating the wheat from the chaff," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1159-1186.
    7. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
    8. Lean Hooi Hooi & Russell Smyth, 2007. "Are Asian real exchange rates mean reverting? Evidence from univariate and panel LM unit root tests with one and two structural breaks," Applied Economics, Taylor & Francis Journals, vol. 39(16), pages 2109-2120.
    9. Matthew Higgins & Egon Zakrajšek, 1999. "Purchasing power parity: three stakes through the heart of the unit root null," Staff Reports 80, Federal Reserve Bank of New York.
    10. David E. Rapach, 2002. "Are Real GDP Levels Nonstationary? Evidence from Panel Data Tests," Southern Economic Journal, John Wiley & Sons, vol. 68(3), pages 473-495, January.
    11. Holmes, Mark J., 2001. "New Evidence on Real Exchange Rate Stationarity and Purchasing Power Parity in Less Developed Countries," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 601-614, October.
    12. Chortareas, Georgios & Kapetanios, George, 2009. "Getting PPP right: Identifying mean-reverting real exchange rates in panels," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 390-404, February.
    13. Gadea, Maria-Dolores & Montanes, Antonio & Reyes, Marcelo, 2004. "The European Union currencies and the US dollar: from post-Bretton-Woods to the Euro," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1109-1136.
    14. Lopez, Claude, 2008. "Evidence of purchasing power parity for the floating regime period," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 156-164, February.
    15. Ahmad Zubaidi Baharumshah & Raj Aggarwal & Chan Tze Haw, 2007. "East Asian Real Exchange Rates and PPP: New Evidence from Panel-data Tests," Global Economic Review, Taylor & Francis Journals, vol. 36(2), pages 103-119.
    16. Axel Grossmann & Marc Simpson & Teofilo Ozuna, 2014. "Investigating the PPP hypothesis using constructed U.S. dollar equilibrium exchange rate misalignments over the post-bretton woods period," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(2), pages 235-268, April.
    17. Tsangyao Chang & Kuei-Chiu Lee & Chien-Chung Nieh & Ching-Chun Wei, 2005. "An empirical note on testing hysteresis in unemployment for ten European countries: panel SURADF approach," Applied Economics Letters, Taylor & Francis Journals, vol. 12(14), pages 881-886.
    18. Narayan Paresh K & Prasad Biman Chand, 2005. "The Validity of Purchasing Power Parity Hypothesis for Eleven Middle Eastern Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 3(2), pages 44-58, August.
    19. Groen, J.J.J., 2000. "New multi-country evidence on purchasing power parity: multivariate unit root test results," Econometric Institute Research Papers EI 2000-09/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    20. Papell, David H., 2006. "The Panel Purchasing Power Parity Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 447-467, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:rmeecf:v:2:y:2004:i:1:n:4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.