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Does purchasing power parity hold after all? Evidence from a robust test

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  • Roberto Fernandes Guimaraes-Filho

Abstract

The paper tests the purchasing power parity (PPP) hypothesis using the Brazilian (versus US) real exchange rate from 1855 to 1990. The novelty of the approach pursued here is methodological. Instead of relying on traditional unit roots and cointegration tests found elsewhere, a robust unit root test recently proposed by Hasan and Koenker is applied. Contrary to traditional least squares based tests, the robust test used here is more powerful under non-Gaussian disturbances. The more conventional ADF, PP and KPSS tests are also applied to the series in question. Contrary to most studies that employ longer samples, the unit root hypothesis cannot be rejected, thus, weakening the validity of PPP as a long-run concept. The inability to reject the unit root hypothesis with more than a century of data poses serious questions for the profession's consensus that PPP holds in the long run.

Suggested Citation

  • Roberto Fernandes Guimaraes-Filho, 1999. "Does purchasing power parity hold after all? Evidence from a robust test," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 167-172.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:2:p:167-172
    DOI: 10.1080/096031099332429
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    References listed on IDEAS

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    1. Edison, Hali J. & Gagnon, Joseph E. & Melick, William R., 1997. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 1-17, February.
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    4. Abuaf, Niso & Jorion, Philippe, 1990. "Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
    5. Mark, Nelson C., 1990. "Real and nominal exchange rates in the long run: An empirical investigation," Journal of International Economics, Elsevier, vol. 28(1-2), pages 115-136, February.
    6. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June.
    7. repec:bla:jfinan:v:43:y:1988:i:4:p:933-48 is not listed on IDEAS
    8. M. N. Hasan & R. W. Koenker, 1997. "Robust Rank Tests of the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 65(1), pages 133-162, January.
    9. Meese, R. & Rogoff, K., 1988. "Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period," Working papers 368, Wisconsin Madison - Social Systems.
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    Cited by:

    1. Dimitrios Sideris, 2006. "Purchasing Power Parity in economies in transition: evidence from Central and East European countries," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 135-143.
    2. repec:prg:jnlpep:v:preprint:id:654:p:1-10 is not listed on IDEAS
    3. Yihui Lan, 2001. "The Explosion of Purchasing Power Parity," Economics Discussion / Working Papers 01-22, The University of Western Australia, Department of Economics.
    4. Wang, Weiguo & Xue, Jing & Du, Chonghua, 2016. "The Balassa–Samuelson hypothesis in the developed and developing countries revisited," Economics Letters, Elsevier, vol. 146(C), pages 33-38.
    5. Imed Drine & Christophe Rault, 2005. "Can the Balassa-Samuelson theory explain long-run real exchange rate movements in OECD countries?," Applied Financial Economics, Taylor & Francis Journals, vol. 15(8), pages 519-530.
    6. Marcos José Dal Bianco, 2008. "Argentinean real exchange rate 1900-2006, test purchasing power parity theory," Estudios de Economia, University of Chile, Department of Economics, vol. 35(1 Year 20), pages 33-64, June.
    7. Burak Güriş & Muhammed Tiraşoğlu, 2018. "The Validity of Purchasing Power Parity in BRICS Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(4), pages 417-426.

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