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Different measures in testing absolute purchasing power parity

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  • Zhibai Zhang
  • Xinyue Zou

Abstract

In popular studies, the theory of purchasing power parity (PPP) is tested for the real exchange rate (RER) that is constructed by price indexes and all variables are logarithmic. In this article, we test the absolute PPP theory for the RER that is constructed by general price levels and is in its original form. Panel unit root and cointegration tests reveal that the RER is stationary and a cointegration relationship exists between nominal exchange rate and PPP rate, which supports the PPP theory. But the RER misalignment is not a normal distribution with zero mean, and the coefficient restriction test also rejects the PPP theory. One reason that leads to the conflicting conclusions is given.

Suggested Citation

  • Zhibai Zhang & Xinyue Zou, 2014. "Different measures in testing absolute purchasing power parity," Applied Economics Letters, Taylor & Francis Journals, vol. 21(12), pages 828-831, August.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:12:p:828-831
    DOI: 10.1080/13504851.2014.887185
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    Cited by:

    1. Zhang, Zhibai, 2015. "Convergence of absolute purchasing power parity," MPRA Paper 64486, University Library of Munich, Germany.
    2. Zhang, Zhibai & Bian, Zhicun, 2015. "Absolute purchasing power parity in industrial countries," MPRA Paper 66241, University Library of Munich, Germany.
    3. Zhibai Zhang & Zhicun Bian & Minghua Zhan, 2022. "Is absolute purchasing power parity special for Spain?," Empirical Economics, Springer, vol. 62(2), pages 513-531, February.

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