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Testing purchasing power parity hypothesis: a semiparametric varying coefficient approach

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  • Hongjun Li
  • Zhongjian Lin
  • Cheng Hsiao

Abstract

Traditional linear cointegration tests of purchasing power parity (hereafter PPP) hypothesis often lead to rejection of the PPP hypothesis. More recent studies allowing for some sort of nonlinearity in econometric modelings (e.g., Michael et al. J Polit Econ 105:862–879, 1997 ) suggest mixed results and leave this problem as an unresolved issue. In this paper, we analyze PPP hypothesis within a semiparametric framework using the varying coefficient model with integrated variables as considered by Cai et al. (J Econ 148:101–113, 2009 ) and Xiao (J Econ 152:81–92, 2009 ). Applying the cointegration test suggested by Xiao (J Econ 152:81–92, 2009 ), we conduct the cointegration test of PPP hypothesis between US and Canada, US and Japan, and US and UK, respectively. In contrast to the usual findings based on linear model PPP hypothesis testing, our semiparametric model-based tests support the PPP hypothesis. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Hongjun Li & Zhongjian Lin & Cheng Hsiao, 2015. "Testing purchasing power parity hypothesis: a semiparametric varying coefficient approach," Empirical Economics, Springer, vol. 48(1), pages 427-438, February.
    • Handle: RePEc:spr:empeco:v:48:y:2015:i:1:p:427-438
    DOI: 10.1007/s00181-014-0813-y
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    2. Morrison, Michael & Fontenla, Matías, 2017. "Purchasing power parity across eight worlds," Economics Letters, Elsevier, vol. 158(C), pages 62-66.
    3. Badi H. Baltagi & Georges Bresson & Jean-Michel Etienne, 2020. "Growth Empirics: a Bayesian Semiparametric Model With Random Coefficients for a Panel of OECD Countries," Advances in Econometrics, in: Essays in Honor of Cheng Hsiao, volume 41, pages 217-253, Emerald Group Publishing Limited.
    4. Ramon E. Lopez & Kevin Sepulveda, 2022. "¿Cual es el efecto de shocks de demanda interna sobre la inflacion en una economia pequena y abierta? Chile 2000-2021," Working Papers wp529, University of Chile, Department of Economics.
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    7. Ying Wang & Peter C. B. Phillips & Yundong Tu, 2024. "Limit Theory and Inference in Non-cointegrated Functional Coefficient Regression," Cowles Foundation Discussion Papers 2399, Cowles Foundation for Research in Economics, Yale University.
    8. López, Ramón & Sepúlveda, Kevin A., 2022. "The effects of domestic demand shocks on inflation in a small open economy: Chile in the period 2000–2021," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
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    More about this item

    Keywords

    Purchasing power parity; Cointegration test; Semiparametric method; Varing coefficient model; C12; C14; F31;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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