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Further evidence on purchasing power parity and country characteristics

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  • Wu, Jyh-Lin
  • Cheng, Su-Yin
  • Hou, Han

Abstract

Using data from 76 countries, this paper investigates the relationship between country characteristics and the validity of purchasing power parity (PPP). Several interesting results are obtained based on dollar-based exchange rates. First, PPP holds for Africa and Latin America. Further, PPP tends to be supported for countries with high or moderate openness, low growth rates, high inflation rates and high nominal exchange rate volatility, respectively. Second, a single country characteristic seems inadequate to account for the validity of PPP. Third, PPP is supported if countries satisfy at least two characteristics of supporting PPP simultaneously. Finally, the main results of the paper are robust when the numeraire currency changes from the US dollar to Japanese yen.

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  • Wu, Jyh-Lin & Cheng, Su-Yin & Hou, Han, 2011. "Further evidence on purchasing power parity and country characteristics," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 257-266, April.
    • Handle: RePEc:eee:reveco:v:20:y:2011:i:2:p:257-266
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    3. Dinçer Afat & Michael Frömmel, 2020. "An Alternative Version of Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(4), pages 511-517, October.
    4. Giannellis, Nikolaos & Koukouritakis, Minoas, 2013. "Exchange rate misalignment and inflation rate persistence: Evidence from Latin American countries," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 202-218.
    5. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
    6. Offermanns, Christian J., 2014. "On the degree of homogeneity in dynamic heterogeneous panel data models," Discussion Papers 2014/25, Free University Berlin, School of Business & Economics.

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