Empirical research on the validity of the purchasing power parity (PPP) condition is generally based on real exchange rates built using the consumer price index (CPI), but fails to provide clear support to PPP. In this paper we show theoretically that, even if the law of one price (LOP) holds for traded goods, CPI-based real exchange rates are not mean reverting, and are neither stationary nor integrated. Therefore, both unit root and stationarity tests should reject their null. Our theoretical results are validated both by simulations and an empirical application.

Pelagatti, M., & Colombo, E. (2015). On the Empirical Failure of Purchasing Power Parity Tests. JOURNAL OF APPLIED ECONOMETRICS, 30(6), 904-923 [10.1002/jae.2418].

On the Empirical Failure of Purchasing Power Parity Tests

PELAGATTI, MATTEO MARIA
Primo
;
COLOMBO, EMILIO
Secondo
2015

Abstract

Empirical research on the validity of the purchasing power parity (PPP) condition is generally based on real exchange rates built using the consumer price index (CPI), but fails to provide clear support to PPP. In this paper we show theoretically that, even if the law of one price (LOP) holds for traded goods, CPI-based real exchange rates are not mean reverting, and are neither stationary nor integrated. Therefore, both unit root and stationarity tests should reject their null. Our theoretical results are validated both by simulations and an empirical application.
Articolo in rivista - Articolo scientifico
Scientifica
Purchasing power parity puzzle, Law of one price, Stationarity, Unit root, Consumer Price Index, Aggregation
English
Pelagatti, M., & Colombo, E. (2015). On the Empirical Failure of Purchasing Power Parity Tests. JOURNAL OF APPLIED ECONOMETRICS, 30(6), 904-923 [10.1002/jae.2418].
Pelagatti, M; Colombo, E
File in questo prodotto:
File Dimensione Formato  
2015 Journal of Applied Econometrics 30 904-923.pdf

Solo gestori archivio

Tipologia di allegato: Publisher’s Version (Version of Record, VoR)
Dimensione 919.72 kB
Formato Adobe PDF
919.72 kB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10281/80380
Citazioni
  • Scopus 4
  • ???jsp.display-item.citation.isi??? 4
Social impact