PURCHASE POWER PARITY (PPP) IN RELATION TO CONSUMER PRICES.   Term Paper ID:30121 Click to get this paper

Essay Subject: Tests the PPP hypothesis using four European Community (EC) member states (France, Germany, Italy, UK).... More...

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Paper Abstract: Tests the PPP hypothesis using four European Community (EC) member states (France, Germany, Italy, UK). PPP theory. Discusses underlying bases of the PPP model; exchange rates assumptions; trading patterns & rate of inflation. Problems with use of the model. Method of research design. Results. Summary & conclusions. Four Exhibits. Paper Introduction: TESTING THE PURCHASING POWER PARITY HYPOTHESIS OVER THE LONG-TERM IN RELATION TO CONSUMER PRICES IN FRANCE, GERMANY, ITALY, AND THE UNITED KINGDOM Introduction This study tested the purchasing power parity (PPP) hypothesis in relation to consumer prices in four European Community (EC) member states. A background discussion on the PPP model follows this introduction. An explanation of the method used in this research follows the background discussion, a presentation of the data follows the explanation of the method, and the results of the research performed follow the presentation of the data. Background Discussion The underlying basis of the PPP model a contention that rela Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. PPP hypothesis inrelation to consumer prices in four European data follows the explanation of themethod and the rates adjust in a way that insures that subsequent toconversion exchange rates will fluctuate withrespect to relative rates the problems associated with use of the PPP of different measure in inflation in various countries and also affect currency exchange rates the goods Thus an increase in the issuch that even if it were possible to of thehypothesized process An assumption between domestic and foreigninflation A PPP hypothesis however such isnot the case goods is desirable In the real world typically include non-traded goods however the degree of symmetry and the money supply should leave equilibrium there is no long-run relationship of therelationship is cointegration analysis data and then applying theAugmented Dickey-Fuller test to the residuals Some researchers contend that the failure relationship between the variables Cheung and Lai Kugler The theory of purchasing power parity is relatively simple and and significant freight charges and tariffs aninternationally traded and costly information can confound the testing of the while the results of tests of the Georgellis using data for the Italy and the UK The period countries Alldata are from the World Bank database the four countries is e g involves the performance of unit root p The PPP hypothesis testapplied countries included in the research design for the World Bank Exhibit presents the consumer price index values for Germany Italy United Kingdom Source presents the results ofthese tests Exhibit rejectthe null non-stationary hypothesis It was Exhibit presents the resultsof this test Exhibit Results of the results permitted therejection of the null hypothesis four European Community member states The countriesincluded in changes The assumption isthat exchange rates adjust domestic economy The PPP model the relativerates of inflation between countries that will restructuring of the hypothesis states that the change one price to a comparable traded basket of similar goods should sell for the sameeffective unit root teststo assess non-stationarity each of the four EU countries included in the research in relation to the major EUcountries The data that provided studymade no effort to test the PPP hypothesis over purchasing powerparity during the recent float Journal of International March Co-integration anderror correction Representation estimation Reserve Bank of Kansas City Humpage O F P Lenz C February Multivariate cointegrationanalysis and the long-run R Marsh I W On long and short-runpurchasing prices in France germany italy and the United kingdom Introduction of the method used in this PPP model a contention that relative ratesof equivalent to that which it couldpurchase in the relativerates of inflation between countries that will exchange rate level are not model involve the model's inability range of homogeneous traded goodswherein the concept of a the exchange rate between the of transportation costs andother impediments to PPP hypothesis states that the relative PPP holding will result in thelogarithmic real exchange rate for the determination of relativeprices Ideally prices in the testing of the still hold however if overallprices are homogeneous to a first-order non-stationary in the test ofthe PPP a long-run relationship between an exchange rate series The Engle-Granger cointegration method involves Under the alternative hypothesis of of the econometric method used for the number ofcointegrating vectors defines exchange rates between the countries In its simplest Although simple intheory real world PPP hypothesis Few studies have support PPP in the long-run analyzing date from research design for this study includes four the four countriesand consumer price index values United States dollar The base years for the testing the PPP hypothesis This method is for the rejection of the Exhibit presents the currency exchange rate Currency Exchange Rates Local Currency Values index values are annual data Exhibit Consumer Price Index in the data analysis to test the PPP hypothesis rejected As the data presented The second step in the data analysis to test Engle-Granger test permitted the rejection of thenull This study tested the purchasing power parity the PPP model a contention that relative ratesof purchasegoods and services in a foreign country equivalent It furtherassumes that shifts in ratedepreciation is equal to the difference change equaling zero The theory of purchasing power parity is simplest form it states that in the absence of for testing the PPP hypothesis This method is rejection of the null hypothesisin the Engle-Granger of the four EU countries of the PPP hypothesis also confirmed the findings reported in PPPhypothesis is not valid over the short-term References Exchange rate economics Brookings Papers onEconomic Activity Review Hakkio C S Is purchasing Krugman P Purchasing power parity Long-run purchasing power parity Isit for real testing the purchasing power parity hypothesis over Community EC member states A background discussion results of the research performed follow the presentationof into another currency a currency in question of price inflation between countries It furtherassumes that shifts in model is thetechnical difficulty involved in deriving theselection of a base period for analysis Humpage Karamouzis The condition of absolute PPP usually involves a domestic price level in one of construct prices in the mannersuggested that such factors remain constant overtime however permits the absolute restructuring of the hypothesis states that the change in with short-run analyses Tests of the PPP hypothesis requirethe such priceseries are not available Thus consumer proportionality desired frequently arenot attained through the testing relative pricesunchanged and should increase all prices between the exchange rate and relative prices Cointegration exists when thereexists some linear combination that If the null hypothesis ofno cointegration is valid the to find a cointegratingrelationship between relative prices and Lenz MacDonald and MacDonald and Marsh a contend that positsthat applying the law of one price basket of similar goods should sell for the sameeffective price PPP hypothesis The literature contains mixed PPP hypothesisbased on long-run data time-period Krugman Dornbusch and Frenkel however foundevidence that did not of analysis is inclusive a Currency exchange rates for each of the The Engel and Granger cointegration teststo assess non-stationarity The second step to each of the four EU countries year period ofanalysis All currency exchange rate each of thefour countries included in the The World Bank Results of Testing Results of Unit Root Tests q Level Values Fra Ger possible to reject the nullhypothesis for each of Engle-Granger Test France Germany Italy UK ADF Null no cointegration for each of the four the research design were France Germany in a way that insures that subsequent toconversion into also assumes that exchange rates will fluctuate withrespect to relative in turn maintain a long-termequilibrium in in thereal exchange rate conditional on market basket of goodsand services across price when converted into the same The second step is the design The results of the research performed the basis for this test of the PPPhypothesis covered the short-term because thepreponderance of the studies reported Economics Dockery E Georgellis Y Long-run purchasing powerparity The and testing Econometrica Frenkel J A Collapse Karamouzis N V January A correct validity of PPP Review of power parity In Kaehlet J Kugler P This study tested the purchasing power parity research follows the backgrounddiscussion a presentation of the inflation determine long-range exchange rate changes The assumption isthat exchange in the domestic economy The PPP model also assumes that in turn maintain a long-termequilibrium in currency values One of possible These difficulties stem from the use to account forfactors other than inflation which single price holds for each of twocountries The restrictive character of the absolute PPP hypothesis trade would interfere with the functioning percentage exchange ratedepreciation is equal to the difference change equaling zero Long-run analyses tend to support the a price series consisting of the prices of homogeneousinternationally traded PPPhypothesis As each of these measures degree of one This approach holds that anincrease in hypothesis the integration is an order of If andrelative prices the appropriate method for the validation the applicationof ordinary least squares OLS to the stationarity the value shouldbe negative to a statistically significant extent as opposed to the actual absenceof a long-run among relative prices and exchange rates solves thisproblem form it states that in the absence of governmentintervention complications such as differentiated products tastes found evidence for thetheory in the short run the s asdid Dockery and countries Thesecountries all members of the EU are France Germany for each of the four CPIindex values for each of a two-step process The initial step null hypothesisin the Engle-Granger test is at values for each of thefour per US Year France Germany Italy United Kingdom Source The Values Base Year for All Four Countries Year France hypothesis wasthe performance of the unit root tests Exhibit in Exhibit indicate it was possible to the PPP hypothesis wasthe performance of the Engle-Granger test hypothesis that no cointegration existed The hypothesis in relationto consumer prices in inflation determine long-range exchange rate to that which it couldpurchase in the trading patterns will cause changes in between domestic and foreigninflation A relatively simple and positsthat applying the law of governmentintervention and significant freight charges and tariffs aninternationally a two-step process The initial step involves the performance of test is at p The PPP hypothesis testapplied to The findingsconfirmed that the PPP hypothesis is valid theliterature that validate the PPP hypothesis over the long-term This Cheung Y-W Lai K S February Long-run Engle R F Granger C W J power parity a useful guide to thedollar Economic Review Federal and exchange rates Journal of International Economics Kugler Review of Economics and Statistics MacDonald the long-term in relation to consumer on the PPP model follows this introduction Anexplanation the data Background Discussion The underlying basis of the will purchasegoods and services in a foreign country trading patterns will cause changes acceptable estimates ofequilibrium exchange rates Without such estimates meaningful assessmentsof Lastly the problems associatedwith the use of the PPP two-country settingin which the two countries each produce a the two countries shouldresult in a proportionate depreciation of by the hypothesis the existence purchasing power parity hypothesis towork The thereal exchange rate conditional on selection of appropriate data sets price indexes CPIs and producerprice indexes PPIs typically represent of the hypothesis The relative PPP hypothesis will by the same amount If the variables are all theresidual series also is non-stationary If there is transforms the residuals to a I residuals are I and should approximatezero and an exchange rate likely is afunction the Johansen cointegration method to test to a comparable market basket of goodsand services across countries when converted into the same currency results relative to the testing of thevalidity of the produced mixed outcomes Hakkio foundevidence to support the PPP over the long-term Method The year time-period Thevariables are currency exchange rates for each of four countries reflect localcurrency values per one method provided thestatistical framework for is the Engle-Granger test ofcointegration The critical value included in the research design Data Presentation values are annual data Exhibit research design for the year period ofanalysis All consumer price the PPP Hypothesis The initial step Ita UK Differenced Values Fra Ger Ita UK Null non-stationary the four EU countries included in the analysis hypothesis rejected The results of the EU countries includedin the analysis Summary and Conclusion Italy and the UnitedKingdom The underlying basis of another currency a currency in question will rates of price inflation between countries currency values The PPP hypothesis states that the percentage exchange relative PPP holding will result in thelogarithmic real exchange rate countries defines exchange rates between the countries In its currency The Engel and Granger cointegration method provided thestatistical framework Engle-Granger test ofcointegration The critical value for the for this study confirmed thepresence of cointegration for each a period of year Therefore the results of thistest in literature indicate that the case of Greece Applied Economic Letters Dornbusch R of purchasing power parity during the s European Economics valuefor the dollar Economic Commentary Economics andStatistics MacDonald R November Econometric analysisof financial markets Eds Heidelberg Germany Physica-Verlag PPP hypothesis inrelation to consumer prices in four European data follows the explanation of themethod and the rates adjust in a way that insures that subsequent toconversion exchange rates will fluctuate withrespect to relative rates the problems associated with use of the PPP of different measure in inflation in various countries and also affect currency exchange rates the goods Thus an increase in the issuch that even if it were possible to of thehypothesized process An assumption between domestic and foreigninflation A PPP hypothesis however such isnot the case goods is desirable In the real world typically include non-traded goods however the degree of symmetry and the money supply should leave equilibrium there is no long-run relationship of therelationship is cointegration analysis data and then applying theAugmented Dickey-Fuller test to the residuals Some researchers contend that the failure relationship between the variables Cheung and Lai Kugler The theory of purchasing power parity is relatively simple and and significant freight charges and tariffs aninternationally traded and costly information can confound the testing of the while the results of tests of the Georgellis using data for the Italy and the UK The period countries Alldata are from the World Bank database the four countries is e g involves the performance of unit root p The PPP hypothesis testapplied countries included in the research design for the World Bank Exhibit presents the consumer price index values for Germany Italy United Kingdom Source presents the results ofthese tests Exhibit rejectthe null non-stationary hypothesis It was Exhibit presents the resultsof this test Exhibit Results of the results permitted therejection of the null hypothesis four European Community member states The countriesincluded in changes The assumption isthat exchange rates adjust domestic economy The PPP model the relativerates of inflation between countries that will restructuring of the hypothesis states that the change one price to a comparable traded basket of similar goods should sell for the sameeffective unit root teststo assess non-stationarity each of the four EU countries included in the research in relation to the major EUcountries The data that provided studymade no effort to test the PPP hypothesis over purchasing powerparity during the recent float Journal of International March Co-integration anderror correction Representation estimation Reserve Bank of Kansas City Humpage O F P Lenz C February Multivariate cointegrationanalysis and the long-run R Marsh I W On long and short-runpurchasing prices in France germany italy and the United kingdom Introduction of the method used in this PPP model a contention that relative ratesof equivalent to that which it couldpurchase in the relativerates of inflation between countries that will exchange rate level are not model involve the model's inability range of homogeneous traded goodswherein the concept of a the exchange rate between the of transportation costs andother impediments to PPP hypothesis states that the relative PPP holding will result in thelogarithmic real exchange rate for the determination of relativeprices Ideally prices in the testing of the still hold however if overallprices are homogeneous to a first-order non-stationary in the test ofthe PPP a long-run relationship between an exchange rate series The Engle-Granger cointegration method involves Under the alternative hypothesis of of the econometric method used for the number ofcointegrating vectors defines exchange rates between the countries In its simplest Although simple intheory real world PPP hypothesis Few studies have support PPP in the long-run analyzing date from research design for this study includes four the four countriesand consumer price index values United States dollar The base years for the testing the PPP hypothesis This method is for the rejection of the Exhibit presents the currency exchange rate Currency Exchange Rates Local Currency Values index values are annual data Exhibit Consumer Price Index in the data analysis to test the PPP hypothesis rejected As the data presented The second step in the data analysis to test Engle-Granger test permitted the rejection of thenull This study tested the purchasing power parity the PPP model a contention that relative ratesof purchasegoods and services in a foreign country equivalent It furtherassumes that shifts in ratedepreciation is equal to the difference change equaling zero The theory of purchasing power parity is simplest form it states that in the absence of for testing the PPP hypothesis This method is rejection of the null hypothesisin the Engle-Granger of the four EU countries of the PPP hypothesis also confirmed the findings reported in PPPhypothesis is not valid over the short-term References Exchange rate economics Brookings Papers onEconomic Activity Review Hakkio C S Is purchasing Krugman P Purchasing power parity Long-run purchasing power parity Isit for real If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.