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Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data (Subsequently published in "Applied Financial Economics", 16, 127-134, 2006. )

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  • Pan A. Yotopoulos

    (University of Florence and (emeritus) Stanford University)

  • Yasuyuki Sawada

    (Faculty of Economics, University of Tokyo)

Abstract

We formulate and implement a new empirical procedure to examine the validity of PPP in the long-run for 153 countries by using the familiar cross-country data set of Heston, Summers, and Aten (2002). Unlike the existing studies that rely on mean reversion of real exchange rates, we explicitly examine country-specificity in the deviations of the nominal exchange rate from PPP. We find, first, that out of a total of 153 countries, 132 countries have achieved PPP within twenty years, 1980-2000 and 105 countries have attained PPP over ten years, 1990-2000. Second, according to the results, our method can be accepted as a workable shortcut of the direct, fullinformation approach of Yotopoulos (1996) that tests for long-run PPP utilizing micro-ICP data. This becomes an important characteristic of this paper since comprehensive micro-ICP data are no longer easily available. As a by-product, of the empirical validation of our shortcut approach, our empirical results are in favor of the Ricardo-Balassa-Samuelson effect.

Suggested Citation

  • Pan A. Yotopoulos & Yasuyuki Sawada, 2005. "Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data (Subsequently published in "Applied Financial Economics", 16, 127-134, 2006. )," CARF F-Series CARF-F-021, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf021
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    References listed on IDEAS

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    Cited by:

    1. Yasuyuki Swada & Pan A. Yotopoulos, 2005. "Corner Solutions, Crises, and Capital Controls: A Theory and an Empirical Analyas on the Optimal Exchane Rate Regime in Emerging Economies," Discussion Papers 04-037, Stanford Institute for Economic Policy Research.
    2. Jovanovic, Branimir, 2007. "Calculating the Fundamental Equilibrium Exchange Rate of the Macedonian Denar," MPRA Paper 43161, University Library of Munich, Germany.
    3. Gábor Oblath & Andrzej Slawinski & Arno Tausch, 2006. "Monthly Report 7/2006," wiiw Monthly Reports 2006-07, The Vienna Institute for International Economic Studies, wiiw.

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