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Purchasing power parity and real effective exchange rates

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  • Su Zhou

    (UTSA)

Abstract

This study re-examines the validity of Purchasing Power Parity (PPP) by focusing on the real effective exchange rates (REERs) for the post-Bretton Woods period, using newly developed unit root tests that account for both nonlinearity and smooth temporary multiple breaks in the data. The tests are applied to the REERs of 23 developed countries and are able to reject the null hypothesis of a unit root in 20 cases. The test results reveal that large swings truly exist in most of the REERs, therefore it is crucial to model these infrequent smooth temporary mean changes in the data in testing the (non)stationarity of the REERs. The study provides stronger support than most of previous studies for that PPP holds in a stricter, multi-country version during the floating exchange rate period for the majority of developed countries.

Suggested Citation

  • Su Zhou, 2013. "Purchasing power parity and real effective exchange rates," Working Papers 0158eco, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0158eco
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    File URL: http://interim.business.utsa.edu/wps/eco/0005ECO-106-2013.pdf
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    References listed on IDEAS

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    4. Christopoulos, Dimitris K. & León-Ledesma, Miguel A., 2010. "Smooth breaks and non-linear mean reversion: Post-Bretton Woods real exchange rates," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1076-1093, October.
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    10. Zhou, Su & Kutan, Ali M., 2011. "Is the evidence for PPP reliable? A sustainability examination of the stationarity of real exchange rates," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2479-2490, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    PPP; Real effective exchange rates; Nonlinear stationarity; Smooth structural breaks;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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