marshall s scale economies using panel data this paper estimates plant level production functions for machinery and high tech industries that allow for scale externalities from other plants in the same industry locally and from the scale or diversity of local economic activity outside the own industry the paper finds that the count of other own industry plants representing a count of local information spillover sources has strong productivity effects in high tech but not machinery industries single plant firms both benefit more from and generate greater external benefits than corporate plants given their greater reliance on external environments on dynamic externalities high tech single plant firms benefit also from the scale of past own industry activity i find little evidence of economies from the diversity or scale of local economic activity outside the own industry

variable returns to agglomeration and the effect of road traffic congestion abstract this paper investigates the links between returns to urban density productivity and road traffic congestion a generalised translog production inverse input demand function is estimated to test for the existence of variable returns to agglomeration in manufacturing construction and service industries two separate measures of urban density in which proximity is represented by straight line distance or by generalised cost are constructed and included in the translog to identify the effect of road traffic congestion the results show that for some sectors of the economy diminishing returns to urban density can set in causing the magnitude of agglomeration elasticity to fall as effective densities increase the generalised cost based measure of agglomeration produces higher elasticities because it captures both time and distance dimensions of density a comparison of spatial variance in estimates indicates that road traffic congestion plays an important role in explaining diminishing returns for the most highly urbanised locations

long run purchasing power parity evidence from some european monetary system countries long run purchasing power parity ppp for five countries participating in the european monetary system ems during the recent floating exchange rate period is studied using new econometric techniques evidence is found supporting long run purchasing power parity moreover the long run ppp relationship is generally stable throughout the period since the dissolution of the bretton woods period even with the advent of the european monetary system frequent realignments within the ems may have served to maintain competitiveness between member countries

instability in short run adjustments to purchasing power parity results for selected latin american countries according to the theory of purchasing power parity ppp there is a tendency toward equalization of different countries price levels in common currency terms however even assuming that a long run ppp relationship exists its relevance for policy makers in less developed countries ldcs will depend not only on the average speed of adjustment toward this relationship but also on the variability of such short run adjustments we present evidence of extreme volatility in adjustments toward ppp for four latin american countries based on time varying parameter estimates of error correction models

maximum likelihood estimation of cointegration in exchange rate models for seven inflationary oecd countries abstract we apply the johansen technique to estimate cointegration in a monetary exchange rate model modified for real exchange rate fluctuations and applied to seven inflationary oecd countries we generally find one or more cointegrating vectors and the signs of their coefficients are broadly consistent with the modified monetary model the adjustment coefficients are also examined our statistical testing is based on bootstrapping and generates much more conservative rejection criteria than the use of asymptotic critical values even after a substantial degree of freedom correction power estimates are also presented finally we conclude that the monetary model unmodified for real exchange rate fluctuations would be inadequate

parity reversion in real exchange rates during the post bretton woods period abstract a common view among recent studies on purchasing power parity is that the post bretton woods period is far too short to reveal any significant parity reversion in individual series of real exchange rates is this really so the answer this study shows depends very much on the statistical test being used two efficient univariate unit root tests are applied to uncover parity reversion these tests require much shorter sample sizes than conventional tests to attain the same statistical power empirical results show that parity reversion can be unveiled over the modern float if an efficient unit root test is applied

nonlinear dynamics in deviations from the law of one price a broad based empirical study abstract in this paper we test empirically the validity of the law of one price using data for five major bilateral us dollar exchange rates and nine goods sectors during the recent floating exchange rate regime since the early 1970s using threshold autoregressive models we find strong evidence of nonlinear mean reversion in deviations from the law of one price with plausible convergence speeds consistent with theoretical arguments on international goods markets arbitrage under transactions costs and with an emerging strand of empirical literature these results contribute towards forming a consensus view in favor of discrete regime switching in deviations from the law of one price and the presence of differing nonzero transactions costs across a broad range of goods and countries

unit root tests and the statistical pitfalls of seasonal adjustment the case of u s postwar real gross national product unit root tests applied to the postwar seasonally adjusted quarterly gross national product series strongly support the null hypothesis of the presence of a unit root in the data generating process evidence reported here with seasonally unadjusted data is far less conclusive it is explained why seasonal adjustment procedures may alter the outcome of conventional tests

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

agglomeration economies and industrial decentralization the wage productivity trade offs abstract this paper examines the industrial location trade offs between the productivity advantages of the metropolitan center and the lower land and the labor costs in outlying regions within the state of sao paulo brazil the results indicate that while plant productivity is enhanced by the considerable agglomeration economies existing within metropolitan sao paulo firms must pay for these benefits in high wages and land costs offsetting labor cost savings can be achieved by locating in outlying regions the evidence presented in this paper suggests that market forces may lead eventually to a spontaneous decentralization of industry

testing long run purchasing power parity under exchange rate targeting abstract the present paper exploits the idea that empirical estimates of the long run ppp relationship may compound two distinct influences coming from the behavior of market participants and policy makers when the latter are targeting the exchange rate this tends to bias tests of long run ppp against its acceptance the validity of the theoretical arguments is assessed by drawing on the experience of two european union countries greece and france for the post bretton woods period estimation biases due to the omission of policy effects are found to be significant only in the case of greece for france our test results provide evidence bearing on the effectiveness of the competitive disinflation strategy pursued by the french authorities

the gold standard perfectly integrated world markets or slow adjustment of prices and interest rates abstract we investigate the balance of payments adjustment mechanism for canada the usa and the uk during the gold standard era regardless of whether the data are stationary or non stationary the results do not support the assumption of perfectly integrated world markets the evidence is more consistent with the price specie flow mechanism with prices and interest rates adjusting over time to restore equilibrium in the balance of payments

long run purchasing power parity with asymmetric adjustment 1 introduction despite its intuitive appeal there is inconclusive evidence supporting purchasing power parity ppp between countries with low inflation rates during the post bretton woods period for example enders 1988 taylor 1988 and macdonald 1993 use various forms of cointegration tests called stage three tests and find that real exchange rates exhibit large fluctuations with slow rates of decay toward a long run mean froot and rogoff s 1995 literature review presents a consensus estimate that deviations from long run ppp have a half life of about three years this is somewhat disappointing since stage three tests seem to be well suited to the task they require no assumptions concerning exogeneity and they imply a sensible dynamic relationship among price levels and the exchange rate the vast literature on ppp is indicative of the importance of the issue and the ambiguity of the findings it is well recognized that standard cointegration tests have low power to reject the null hypothesis of no cointegration this observation is especially relevant for ppp since any mean reversion in real rates is very gradual and the length of the post bretton woods period sample period is relatively short efforts to increase the power of unit root and stage three tests have had mixed success for example lothian and taylor 1996 and mark 1990 have tried to circumvent the low power of stage three tests by using long spans of time series data unfortunately the use of long time spans raises the possibility of structural changes occurring during the period being examined panel unit root tests are generally more supportive of ppp than are bilateral tests of real exchange rate behavior for example oh 1996 wei and parsley 1995 and wu 1996 have used panel data in order to enhance the power of standard unit root tests although these particular articles are supportive of ppp panel studies must deal with the thorny issues of cross sectional correlation and the choice of the nations to include in the panel papell 1997 finds that allowing for serial correlation substantially weakens the evidence in favor of long run ppp o connell 1998 applies generalized least squares to panel data to eliminate any contemporaneous correlation in the error structure and finds no evidence supporting ppp the second problem with the standard unit root and cointegration tests is that they implicitly assume symmetric adjustment however official intervention in the foreign exchange market means that nominal exchange rate adjustment may be asymmetric under a managed float for example one of the monetary authorities might be more willing to tolerate currency appreciation than depreciation similarly a currency band mitigates exchange rate movements until the level of the band is altered furthermore the slow adjustment of real exchange rates is often explained by the stickiness of national price levels for example in the well known dornbusch 1976 overshooting model prices and the exchange rate move in the same proportion as the money supply in the very long run however in the short run prices are sticky and monetary shocks cause ppp deviations since the exchange rate moves proportionately more than prices rhee and rich 1995 and madsen and yang 1998 provide empirical evidence corroborating the implications of the asymmetric price adjustment models the key point to note is that if prices are primarily sticky in the downward direction there is no reason to presuppose that real exchange rate adjustment is symmetric in spite of the evidence supportive of asymmetric exchange rate and price adjustments there are only a few nonlinear tests of ppp although they do not explicitly test for ppp michael nobay and peel 1997 and taylor and sarno 1998 estimate real exchange rates as smooth transition threshold adjustment processes enders and falk 1998 formally apply various nonlinear unit root tests to real exchange rates and find little evidence of ppp

nonlinear adjustment to purchasing power parity in the post bretton woods era abstract this paper models the dynamics of adjustment to long run purchasing power parity ppp over the post bretton woods period in a nonlinear framework consistent with the presence of frictions in international trade we estimate exponential smooth transition autoregressive estar models of deviations from ppp which are obtained using the johansen cointegration method for both consumer price index cpi and wholesale price index wpi based measures and a broad set of us trading partners in several cases we find clear evidence of a mean reverting dynamic process for sizable deviations from ppp with the equilibrium tendency varying nonlinearly with the magnitude of disequilibrium analysis of impulse response functions also supports a nonlinear dynamic structure but convergence to long run ppp in the post bretton woods era is very slow

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

purchasing power parity evidence from a new panel test this paper uses a recently suggested test for unit roots in panels of time series data maddala and wu oxford bulletin of economics and statistics 61 631 52 1999 to consider the purchasing power parity hypothesis the major innovation of this test is that it allows both the testing of unit root null using the adf test and the stationarity null using the kpss test it is found that the results are inconsistent suggesting that either alternative hypotheses to a unit root may need to be considered or that panel based testing in this particular context may be of limited value

real exchange rate behaviour evidence from black markets the behaviour of real exchange rates relative to the us dollar is examined using monthly data obtained from the black markets for foreign exchange of eight asian developing countries the data span is 31 years the black market real exchange rates do not show excess volatility during the recent float which is in sharp contrast to the results reported elsewhere unit root tests in heterogeneous panels and variance ratio tests confirm their stationarity thus we find support for ppp but not for the survivorship bias froot and rogoff 1995 there is little evidence of segmented trends issues raised by rogoff 1996 of whether ppp would hold across countries with differing growth experience and lothian and taylor 1996 of whether the degree of relative price volatility may bias results in favour of mean reverting real exchange rates are addressed copyright 2000 john wiley sons ltd

declining city productivity and the growth of rural regions a test of alternative explanations prior to the 1970s the u s witnessed a net flow of migrants from its nonmetropolitan to its metropolitan region since then however a dramatic reversal of this long standing tendency for people to concentrate in metropolitan places has been observed nonmetropolitan places have gained migrants largely as the result of increased outmigration from metropolitan areas an open question has been to what extent the employment profile between metropolitan and nonmetropolitan places parallels that of population this paper introduces a data series compiled from county business patterns that is used to analyze the employment trends for the first time the analysis reveals that not only is total employment growing fastest in nonmetropolitan counties but it also appears that the turnaround in employment growth preceded the reversal in the rate of population increase manufacturing which had faster nonmetropolitan growth rates even during the 195os appears to have led in the development of nonmetropolitan counties this shift of manufacturing has attracted other sectors as well as people to nonmetropolitan places part of the recent growth of nonmetropolitan counties represented nothing more than a continuation of suburbanization or spillover of people and jobs which permitted one more outward bound into adjacent nonmetropolitan counties but there is more to nonmetropolitan development than simply metropolitan spillover nonmetropolitan counties far removed from metropolitan ones are also growing faster than metropolitan counties it is shown that this rural renaissance is part of a general deconcentration

a triangular purchasing power parity hypothesis we propose a triangular purchasing power parity ppp analytical framework which is theoretically justified and empirically validated the mechanisms and channels through which a seemingly mystery relationship emerges are deliberated and examined which renders significant implications to international monetary economics finance and business the de facto peg of the rmb to the us dollar together with trade activities and arrangements causes a triangular ppp effect that the dollar euro exchange rate is not a function of the relative prices in the us and euroland instead it becomes a function of the relative prices in the people s republic of china prc and euroland the results are supportive of triangular ppp in a three economy world of the us euroland and prc

long memory in foreign exchange rates using the geweke porter hudak test we find evidence of long memory in exchange rate data this implies that the empirical evidence of unit roots in exchange rates may not be robust to long memory alternatives fractionally integrated autoregressive moving average arfima models are estimated by both the time domain exact maximum likelihood ml method and the frequency domain approximate ml method impulse response functions and forecasts based on these estimated arfima models are evaluated to gain insight into the long memory characteristics of exchange rates some tentative explanations of the long memory found in the exchange rates are discussed

real and nominal exchange rates in the long run an empirical investigation abstract this paper reports on econometric tests of the hypothesis that purchasing power parity holds as a long run relationship using data on eight industrialized countries during the flexible exchange rate period the empirical work proceeds by i testing whether nominal exchange rates and relative price levels are co integrated and ii conducting impulse response analysis of long run exchange rate and relative price level changes to explain the data keynesian models suggest that shocks during the estimation period were due principally to exogenous shifts in aggregate demand while equilibrium models suggest that monetary factors have been relatively more important

cointegration tests of purchasing power parity the impact of non traded goods abstract this paper explores the relationship between non traded goods relative prices and the real exchange rate we apply the johansen maximum likelihood procedure to two different data sets of traded and non traded prices first we develop a model which highlights the importance of non traded relative price movements in causing deviations in the real exchange rate away from ppp we find a strong association a rise fall in the domestic relative price of non traded goods is associated with an appreciation depreciation in the real exchange rate while the opposite is true for the foreign relative price we conclude that non traded goods relative price movements are an important determinant of real exchange rate behavior

integration cointegration and the forecast consistency of structural exchange rate models abstract we propose an alternative set of criteria for evaluating forecast rationality the forecast and the actual series 1 have the same order of integration 2 are cointegrated and 3 have a cointegrating vector consistent with long run unitary elasticity of expectations we denote forecasts that meet these criteria as consistent forecasts generated from monetary models generally pass 1 however using the johansen procedure cointegration fails to hold the longer the horizon of the cointegrated pairs 3 is not generally rejected using the horvath watson procedure imposing the unitary coefficient restriction we find fewer instances of consistency although a higher proportion of the cases of consistency are found at the longer horizons

second best cost benefit analysis in monopolistic competition models of urban agglomeration abstract this paper examines the agglomeration benefits of a transportation improvement in a city by modeling the microstructure of urban agglomeration based on monopolistic competition of differentiated intermediate products properly extended to include variety distortion in addition to price distortion harberger s measure of excess burden yields the agglomeration benefits the agglomeration benefits are positive if increasing the variety is procompetitive however in the anticompetitive case we cannot exclude the possibility of negative additional benefits if there are multiple cities the net agglomeration benefits can be negative when other cities that experience a reduction in population have larger agglomeration economies

does the exchange rate follow a random walk a monte carlo study of four tests for a random walk abstract several authors have urged that real and nominal exchange rates follow a random walk conditions under which the exchange rate follows a random walk are reviewed in this paper many of these do not appear to hold therefore the empirical evidence presents a puzzle some evidence suggets the exchange rate follows a random walk while other evidence suggests the opposite should be true this paper attempts to reconcile the evidence it is argued that the tests for a random walk have low power monte carlo evidence on four tests for a random walk is presented that suppors this claim

fractional cointegration low frequency dynamics and long run purchasing power parity an analysis of the australian dollar over its recent float a relatively new but generalized concept of fractional cointegration is applied to shed some light on the validity of purchasing power parity ppp as a long run equilibrium condition by examining the long run relationship between quarterly consumer price indices and bilateral exchange rates of the australian dollar and seven major oecd trading partners over australia s recent float the paper demonstrates that relaxing the condition that the residual from the cointegration equation must be a i 0 process provides a wide range of cases of parity reversion with processes that are ci 1 d with 0 d 1 findings tend to suggest that while standard tests of cointegration fail to support cointegration between nominal exchange rates domestic and foreign prices and thus the empirical favour for ppp as a long run phenomenon the fractional cointegration analysis permits deviations from equilibrium to follow a fractionally integrated process and hence captures a much wider class of parity or mean reversion

a test of long run purchasing power parity abstract there is a continuing debate whether purchasing power parity holds as a long run equilibrium relationship this note applies an exact small sample pointwise most powerful invariant unit root test to annual long horizon real exchange rates this test finds clear and consistent evidence in favor of the true purchasing power parity relationship

mean reversion of real exchange rates in high inflation countries we test for mean reversion in real exchange rates using data from five countries four of which have experienced episodes of high inflation using monthly data for argentina brazil chile colombia and israel we find that a stochastic unit root model is typically appropriate brazil is the exception kalman filter estimates of the stochastic unit roots show sharp deviations from unity associated with high inflation episodes this suggests that stochastic unit root models are a more appropriate way to model mean reversion in real exchange rates for high inflation countries than models with fixed rates of mean reversion

monetary policy elasticity dynamics and real exchange rate reversal models of hysteresis in trade invoke permanent shifts in competitiveness to explain the real exchange rate reversal of the 1980s these models predict an immediate and permanent response of competitiveness to exchange rate overshooting in contrast an extensive empirically based j curve literature suggests a lagged response of competitiveness to real exchange rate movements this paper shows that such trade balance elasticity dynamics offer an attractive alternative explanation of real exchange rate reversal copyright 1995 by ohio state university press

generalized long memory and mean reversion of the real exchange rate definitive evidence regarding a rapid mean reversion of the real exchange rate is not present when using standard linear methodology including unit root tests and fractional integration to consider the robustness of these results we use an encompassing model the gegenbauer autoregressive moving average garma model which nests as special cases the existing linear methods the garma model accommodates a complete notion of persistence and allows shocks to dissipate slowly in a cyclical manner we find evidence supporting a weak version of purchasing power parity where equilibrium errors are long memory with strongly persistent cycles however this new form of cyclical mean reversion is likely too slow to be economically meaningful the inability to find a strong equilibrium attractor process using a very general encompassing linear methodology provides support for the recent models that allow for a nonlinear attraction process and for shifting real exchange rate equilibria

a fractional cointegration analysis of the long run relationship between black and official foreign exchange rates the case of the brazilian cruzeiro this paper applies a relatively new but generalized concept of fractional cointegration to shed some light on the validity of a long run relationship between monthly black and official us dollar rates of the brazilian cruzeiro an investigation of the stochastic properties of these rates reveals that while the relationship is not cointegrated in their logs they appear to be fractionally cointegrated if we allow for mean reverting processes that are ci 1 d with 0 d 1 the paper demonstrates that relaxing the condition that the residual from the cointegration equation must be a i 0 process captures a much wider class of mean reversion behaviour furthermore an analysis of the short run dynamics propelling the long run relationship tends to imply that although the official rate influences the changes in the black rate this is purely over the short run in the longer term the black rate is found to be the initial receptor of any exogenous shock to the equilibrium and it is the official exchange

price indices and nonlinear mean reversion of real exchange rates author affiliation jyh lin wu institute of economics national sun yat sen university kaohsiung 804 taiwan jlwu2 mail nsysu edu tw and the department of economics national chung cheng university chia yi 106 taiwan ecdjlw ccu edu tw corresponding authorpei fen chen department of international business and trade shu te university kaohsiung taiwan cpf mail stu edu tw acknowledgment we thank two anonymous referees for interesting and constructive comments on an earlier version of the paper any remaining errors are ours 1 introduction are price indices crucial for the existence of a nonlinear mean reversion of real exchange rates do prices or exchange rate adjustments dominate when deviations from purchasing power parity ppp occur is the half life implied by a nonlinear model reasonable the purpose of this article is to address the above three questions for the uk and new zealand over the period of recent float the ppp hypothesis has been one of the most intensive research issues in empirical international finance over the past two decades the rationale behind it is a simple arbitrage hypothesis which results in a linear adjustment of deviations from ppp and the stationarity of real exchange rates empirically existing evidence based on unit root tests provide mixed results for ppp abuaf and jorion 1990 mark 1990 o connell 1998a theoretically there are several reasons for the nonlinear adjustment of deviations from ppp such as the existence of market frictions or transaction costs sercu uppal and van hulle 1995 in addition models of pricing to market and exchange rate pass through give rise to impediments to goods arbitrage krugman 1987 froot and klemperer 1989 the implication is that the speed of adjustment of deviations from ppp depends on the magnitude of the deviations on the other hand the adoption of a price index is crucial in examining ppp several authors have argued that the consumer and producer price indices cpi and ppi respectively do not correspond to their theoretical counterparts and contain measurement errors and aggregation biases cheung and lai 1993 imbs et al 2005 in addition the commodity basket for cpi and ppi includes nontradable goods which impart a nonstationary component to real cpi or ppi exchange rates engel 1999 recently xu 2003 argues that the price index of traded goods tpi is the appropriate one for ppp since it reflects the behavior of arbitrage better than the cpi or ppi the purpose of this article therefore is to examine the nonlinear dynamics of tpi based real exchange rates several authors have applied a smooth transition autoregressive star model to capture the nonlinear dynamics of real exchange rates as it allows for a smooth adjustment between regimes michael nobay and peel 1997 taylor peel and sarno 2001 there are several reasons for us to apply a band threshold autoregressive tar instead of a star type model in our empirical analysis first our empirical evidence fails to reject the unit root hypothesis against the hypothesis of a nonlinear star stationary process based on the test provided by kapetanios shin and snell 2003 1 second the plots of cpi ppi and tpi based real exchange rates in figure 1 show that the tpi based real rate has the largest variation among these three real rates third our empirical evidence rejects the null hypothesis of linearity against tar type nonlinearity and supports the hypothesis that real exchange rates are tar type stationary figure 1 plots of real exchange rates for the uk and new zealand figure omitted see article image several empirical studies have applied a threshold type process to examine the nonlinear mean reversion of real exchange rates obstfeld and taylor 1997 o connell 1998b taylor 2001 sarno taylor and chowdhury 2004

panel unit root tests of purchasing power parity for price indices abstract this paper adopts four panel unit root tests to evaluate ppp over the floating period for six different price indices results generally support ppp albeit the speeds of adjustment differ considerably between price indices and test procedures the degree of contemporaneous and serial correlation as well as heterogeneity of the series in the panel affect stationarity and the speed of mean reversion

structural error correction models a system method for linear rational expectations models and an application to an exchange rate model this paper develops a system instrumental variable method to estimate the speed of adjustment coefficient in the long run equilibrium of structural error correction models for a class of linear rational expectations models this method is applied to an exchange rate model with sticky prices in which the speed of adjustment coefficient governs the half life of the real exchange rate compared to single equation methods the system method gives smaller half life estimates with sharper standard errors

testing for absolute purchasing power parity abstract purchasing power parity ppp is an equilibrium condition equating the nominal exchange rate between two countries with the relative price of an identical bundle of goods in each country previous time series researchers use price indices to study ppp so they test relative ppp we use new data that measures price levels so we test absolute ppp price levels provide a test of absolute ppp because unlike price indices price levels do not contain a base period in which the nominal exchange rate equals the price ratio by construction we find support for absolute ppp

do relative prices of non traded goods determine long run real exchange rates in this paper the long run assumptions of so called equilibrium models of real exchange rates are investigated the assumption of purchasing power parity for tradable goods common to this class of models implies that the real exchange rate is a function of the relative prices of nontraded goods in the two countries while purchasing power parity for tradable goods is not directly testable exploitation of wholesale and consumer prices allows for direct estimation of the reduced form cointegration tests are performed for twenty one bilateral relationships while much of the evidence is consistent with the predictions of equilibrium models results are far from conclusive

purchasing power parity under the european monetary system abstract using reduced rank cointegration analysis this study examines whether exchange rate realignments are effective in extenuating the deviations from purchasing power parity ppp under the european monetary system ems in contrast to previous studies more positive evidence for the ppp hypothesis is found the difference in findings can be attributed partly to the statistical technique used the correction of the finite sample bias and the adjustment for realignment effects in general the results of this study support that currency realignments of the ems have been effective in maintaining ppp among its member countries

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

pass through of exchange rates and purchasing power parity abstract in this paper we develop and test two hypotheses about purchasing power parity ppp the first is that changes in the price of traded goods relative to domestic substitutes will affect the ppp relation due to the partial pass through of exchange rates the second is that ppp should hold on forward rather than spot exchange rates due to hedging by firms which implies that the interest rate differential should enter the ppp relation for spot rates using quarterly data for several countries we find support for both these hypotheses though the magnitude of the interest rate effect is very small

real exchange rates ppp and the relative price of nontraded goods the purchasing power parity hypothesis ppp states that nominal exchange rates move with differences in relative prices between economies the theory has received considerable attention in the economic literature since cassell 6 and is the foundation of many long run theoretical hypotheses in international finance yet its empirical validity remains in question many tests of ppp focus on the stationarity of the real exchange rate the nominal exchange rate adjusted for changes in price levels between economies if domestic and foreign price levels and the nominal exchange rate are integrated then cointegration between these variables implies the existence of both a long run equilibrium relationship and ppp the residual the real exchange rate then follows a stationary process the paper uses the multivariate cointegration methodology of johansen 16 and johansen and juselius 17 18 to examine the source of real exchange rate nonstationarity is the nonstationarity due to shifts in the domestic and foreign price of nontradeables or productivity differentials between traded and nontraded sectors or is the nonstationarity a possible outcome of difficulties in intercountry comparisons of prices movements associated with construction of these price indices most research finds the real exchange rate follows a nonstationary process due to the presence of a unit root 8 12 1 9 19 27 however the existence of a variable trend in the real exchange rate does not imply the absence of a long run relationship between relative prices levels and nominal exchange rates for two reasons first a long run relationship between price levels and nominal exchange rates may exist but not the one for one relationship implicit in the calculation of real exchange rates due to measurement differences in the construction of price indices between economies second ppp violations may occur due to the presence of permanent productivity innovations which affect the relative price of nontradeables if these shocks are not represented by measurable variables a cointegrating relationship will not exist the paper constructs traded and nontraded gdp price indices and productivity rates for 14 oecd economies and tests 1 if the variable trend the nonstationary process in the real exchange rate is due to permanent innovations in relative price of domestic and foreign nontradeables 2 if long run ppp violations are due to permanent movements in the relative price of nontradeables 3 if the nonstationarity in the real exchange rate is due to permanent innovations in domestic and foreign productivity differentials between the traded and nontraded sectors 4 if the variable trend in the relative price of nontradeables is due to permanent innovations in productivity between sectors lastly the paper constructs a cointegrating error correction model

investigating nonlinearities in real exchange rate adjustment threshold cointegration and the dynamics of exchange rates and relative prices abstract motivated by growing evidence of nonlinear mean reverting behavior in real exchange rates this paper investigates the underlying dynamics in the context of a threshold vector error correction model tvecm of nominal exchange rate and relative prices unlike univariate models our nonlinear multivariate framework takes into explicit account the joint behavior and individual dynamics of the nominal exchange rate and relative prices when these two key variables are threshold cointegrated our empirical application unravels their relative contribution to mean reversion and underscores the importance of capturing their interactions in investigating the nonlinear adjustment toward purchasing power parity

arima and cointegration tests of ppp under fixed and flexible exchange rate regimes real exchange rates between the united states and its major trading partners were calculated for the bretton woods and flexible exchange rate periods unit root tests indicate that purchasing power parity performed poorly in both periods tests for cointegration reveal limited instances in which it is possible to estimate the deviations from ppp as an error correcting model the estimated error correcting models indicate that foreign but not u s prices responded to deviations from ppp frenkel s 1981b finding that purchasing power parity ppp worked better during the 1920s than the 1970s caused considerable controversy for example davutyan and pippenger 1985 contend that the socalled collapse of ppp is a result of an increase in the relative importance of real versus monetary shocks they argue that the 1970s as opposed to the 1920s was characterized by real supply shocks and the international coordination of monetary policies the argument is that ppp did not fail rather there was an increase in the volatility of those factors giving rise to deviations from ppp hakkio 1984 reestimated ppp over the 1920s and 1970s using cross country tests i e sure estimates to improve the efficiency of his estimates he was able to support the hypothesis that ppp worked better in the 1970s than in the 1920s on the other hand papers by adler and lehman 1983 dornbusch 1980 frenkel 1981a junge 1985 and krugman 1978 report findings contrary to the ppp hypothesis moreover kenen and rodrik 1986 find that the volatility of real exchange rates has increased throughout the flexible rate period this paper tries to shed some light on the importance and persistence of the observed deviations from purchasing power parity under alternative exchange rate systems while it is interesting to compare ppp in the 1920s versus the 1970s it is equally useful to compare the 1960s versus the 1970s and 1980s if real supply shocks and lack of monetary coordination are characteristic of the latter period ppp should perform better in the 1960s to illustrate the issues involved consider the following econometric model of relative purchasing power

real exchange rates under the gold standard purchasing power parity is one of the most important equilibrium conditions in international macroeconomics empirically it is also one of the most hotly contested numerous recent studies for example have sought to determine the validity of purchasing power parity using data from the post bretton woods float and have reached different conclusions we assert that most such studies are flawed for two reasons first the post 1973 data contain by definition only a very limited amount of the low frequency information relevant for examination of long run parity second the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low frequency dynamics both deficiencies are rectified in the present paper with dramatic results we construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period and we study deviations from parity using long memory models that allow for subtle forms of mean

the common trend and transitory dynamics in real exchange rate fluctuations this study examines the behaviour of both common trend ct and transitory components of real exchange rate rer fluctuations under the current float the ct component is in most cases found to be sizeable albeit its relative importance can vary considerably across major currencies and its estimate can be sensitive to whether or not long run purchasing power parity ppp is imposed on the data further analysis suggests that both ct and transitory innovations are linked much more to interest rate changes than to productivity changes accordingly it is interest rate not productivity disturbances that drive the highly persistent rer

long run purchasing power parity revisited a monte carlo simulation the existence of long run purchasing power parity ppp implies that a cointegration vector of nominal exchange rate domestic price and foreign price is expected regardless of using the engle granger two step method or johansen maximum likelihood approach however this paper has found conflicting results the engle granger technique tends to reject the long run ppp hypothesis whereas the johansen method is generally supportive of long run ppp via monte carlo simulations the present paper finds that the johansen approach has a bias toward supporting long run ppp especially under the circumstances in which the assumption of normally or and independently and identically distributed disturbance terms is violated

real exchange rates and switching regimes abstract we suggest that the real exchange rate between the major currencies in the post bretton woods period can be described by a stationary 2 state markov switching ar 1 model based on the forecast performance we find that this model outperforms two competing models where the real exchange rate is nonstationary we also find that the existence of different regimes as in the markov switching model is consistent with the common finding of unit roots in real exchange rates

deviations from purchasing power parity under different exchange rate regimes do they revert and if so how abstract we propose an empirical model for deviations from long run purchasing power parity ppp that simultaneously accounts for three key features i adjustment toward ppp may occur via nominal exchange rates and relative prices at different speeds ii different exchange rate regimes may generate regime shifts in the structural dynamics of ppp deviations iii nonlinear reversion toward ppp in response to shocks this empirical framework encompasses and synthesizes much previous empirical research using over a century of data for the g5 countries we provide evidence that long run ppp holds the relative importance of nominal exchange rates and prices in restoring ppp varies over time and across different exchange rate regimes and reversion to ppp occurs nonlinearly at a speed that is fairly consistent with the nominal rigidities suggested by conventional open economy models

evidence on ppp for selected asian countries from a panel cointegration test with structural breaks the goal of this article is to examine evidence for purchasing power parity ppp for a panel of asian countries namely malaysia thailand india pakistan sri lanka and the philippines our main contribution is that for the first time in this literature we use a panel cointegration test developed by westerlund 2006 which allows us to incorporate multiple structural breaks we find that using gregory and hansen s 1996 residual based test for cointegration and pedroni s 1999 panel cointegration test without structural breaks provide weak evidence of cointegration between nominal exchange rates vis a vis the us dollar and relative prices however when we use the lagrange multiplier panel structural break cointegration test we find strong evidence of panel cointegration providing evidence for ppp

measuring the persistence of deviations from purchasing power parity with a fractionally integrated star model abstract empirically elements of both fractional long memory and threshold non linearity are present in the real exchange rates of the g 7 countries against the us notably in the eu countries estimated half lives of deviations from ppp using median unbiased corrections to conventional linear autoregressive models corroborate existing evidence related to the ppp paradox as half lives range from at least four years to an infinite number of years in contrast for each eu country accounting for threshold non linearity results in estimated half lives that can be less than three years even with the allowance for fractional long memory

long run purchasing power parity during the recent float abstract this paper examines the relevance of long run purchasing power parity ppp which allows for measurement errors during the recent floating exchange rate period previous empirical studies generally fail to find support for long run ppp over this period in this paper in this paper the cointegration property of exchange rates and prices is examined using maximum likelihood procedure and we find significant evidence favorable to long run ppp further tests for symmetry and proportionality indicate that these two conditions are not generally with the data the results support the hypothesis of long run ppp with measurement errors in prices

beyond the purchasing power parity testing for cointegration and causality between exchange rates prices and interest rates abstract this paper reexamines the causality between the dollar and the yen in a multivariate framework with the aid of cointegration and error correcting modeling for the 1951 94 period the phillips perron tests and johansen s tests are performed while causality from interest rates to exchange rates is found in the short run no causality between prices and exchange rates is found in the short run however causality is found running from relative prices to exchange rates along with interest rates between the u s and japan in the long run which supports the long run ppp hypothesis

is the relationship between prices and exchange rates homogeneous empirical tests of purchasing power parity ppp are implicitly based on the conditions of symmetry and proportionality of the price coefficients we investigate a separate condition which we term homogeneity specifically while there may be factors that drive a wedge between prices and exchange rates when these factors are held constant we would expect a change in exchange rates to be associated with a proportional or homogeneous change in prices to test for the existence of homogeneity in prices we conduct two experiments first we apply a time varying coefficient procedure to nine euro area countries as well as the euro area as a whole during the monthly sample period 1999 m1 to 2011 m3 second we apply the same procedure to the same group of countries plus canada japan and mexico over the longer period 1957 m4 to 2011 m3 we find that averages of the price coefficients corrected for specification biases are uniformly homogeneous in the long run providing strong support for ppp

nominal exchange rate regimes and the real exchange rate abstract two assumptions about the real exchange rate are common in the literature on international finance 1 the real exchange rate is a random walk 2 the time series properties of the real exchange rate depend on the nominal exchange rate regime this paper presents evidence that indicates that the random walk behavior of the real exchange rate is only a characteristic of the post world war ii period moreover our findings also suggest that what is crucial to the real exchange rate behavior is the particular historical period rather than the nominal exchange rate arrangement

agglomeration economies in urban manufacturing industries a case of japanese cities abstract the effects of urban agglomeration economies on productivities in two digit manufacturing industries is estimated using the cross section data of japanese cities in 1979 urbanization and localization economies which are major forms of urban agglomeration economies are explicitly separated the estimates of these economies vary considerably among industries light industries receive more productive advantages from urbanization economies than from localization economies but heavy industries experience these economies more from localization economies than from urbanization economies

linear or nonlinear cointegration in the purchasing power parity relationship we test long run purchasing power parity ppp within a general model of cointegration of linear and nonlinear form nonlinear cointegration is tested with rank tests of breitung 2001 we determine first the order of integration of each variable using monthly data from the post bretton woods era for g 10 countries in many cases prices are i 2 whereas all exchange rates are i 1 however there are several countries that have a price level that linearly cointegrates with the us price level so that this combination is i 1 overall we find some though limited evidence for nonlinear and also linear cointegration for the weak version of ppp

purchasing power parity price indices and exchange rate forcasts abstract this paper addresses the issue of using aggregate price indices for purchasing power parity ppp tests and the fitness of ppp as a model for exchange rate forecasting compared with consumer price index cpi and wholesale price index wpi the price index of traded goods tpi appears to be a more appropriate price index for both ppp tests and exchange rate forecasting it performs better in the tests and provides superior exchange rate forecasts both within and out of sample while the half life of the estimated deviations from ppp is about two years for the cpi and wpi based real exchange rates it is only one year for the tpi based real exchange rates

currency boards more than a quick fix currency boards more than a quick fix once a popular colonial monetary arrangement currency boards fell into disuse as countries gained political independence but recently currency boards have made a remarkable come back this essay takes a critical look at their performance are currency boards really a panacea for achieving low inflation and high growth or do they merely provide a quick fix allowing authorities to neglect fundamental reforms and thus fail to yield lasting benefits we have three major findings first the historical track record of currency boards is sterling with few instances of speculative attacks and virtually no involuntary exits countries that did exit from currency boards did so mainly for political rather than economic reasons and such exits were usually uneventful second modern currency boards have often been instituted to gain credibility following a period of high or hyperinflation and in this regard have been remarkably successful countries with currency boards experienced lower inflation and higher if more volatile gdp growth compared to both floating regimes and simple pegs the inflation difference reflects both a lower growth rate of money supply a discipline effect and a faster growth of money demand a credibility effect the gdp growth effect is significant but may simply reflect a rebound from depressed levels third case studies reveal the successful introduction of a currency board to be far from trivial requiring lengthy legal and institutional changes as well as a broad economic and social consensus for the implied commitment moreover there are thorny issues as yet untested regarding possible exits from a currency board thus currency boards do not provide easy solutions but if introduced in the right circumstances with some built in flexibility they can be an important tool for gaining credibility and achieving macroeconomic stabilization atish r ghosh anne marie and holger c wolf

cointegration and tests of purchasing power parity nonstationarity in the levels of spot exchange rates and domestic and foreign price indices makes the use of conventional tests of the absolute version of purchasing power parity ppp inappropriate if ppp is true inter country commodity arbitrage ensures that deviations from a linear combination of spot exchange rates and domestic and foreign price levels should be stationary under these conditions exchange rates and price levels should form a cointegrated system we find the null hypothesis of no cointegration cannot be rejected for all five countries thus violating the long run absolute version of ppp

cointegration tests of purchasing power parity in africa abstract despite two decades of implementing economic reforms there is still a significant gap between official and black market exchange rates in africa african policy makers continue to implement exchange rate policies based largely on the assumption that purchasing power parity ppp holds this paper examines whether there is empirical support for ppp in africa we used johansen s cointegration technique and error correction modeling on annual data for black market exchange rates and cpi in 30 countries covering 1960 97 we found strong support for the ppp doctrine as a useful guide for exchange rate policy reform in africa

the translog production function and variable returns to scale this paper examines existing methods of estimating the translog production function and provides a general framework that allows for variable returns to scale the model is based on the inverse input demand function and embeds a nonhomothetic production technology previous estimation methods are valid only for homogeneous technologies with fixed scale effects estimation results for u s manufacturing show that neither homotheticity and homogeneity nor constant returns to scale is a proper characterization of the underlying structure of production thereby vindicating the empirical relevance of the inverse demand framework that entails a nonhomothetic technology copyright 1992 by mit press

firm location and city size reduced productivity advantages as a factor in the decline of manufacturing in urban areas abstract this paper develops a model of firm location and city size that arrives at theoretical conclusions that differ from those of other authors comparative statics results suggest that changes in national wage levels and productivity levels create no determinate dis advantage for large cities relative to small ones as sites for manufacturing activity increased wage and reduced productivity premiums of large cities however result in unambiguous disadvantages statistical analysis indicates that the productivity advantages of large cities have declined in as many as eight two digit manufacturing industries that provide more than one third of metropolitan production worker employment

capital flows real exchange rate misalignment and ppp tests in emerging market countries the economic performance of emerging markets has significant impacts on economic growth and volatility of macroeconomic indicators in various countries emerging markets accounted for 20 43 of global exports during the period 1970 2005 and held 70 of global foreign reserves in recent years more than 50 of the exports from the euro area japan and the united states go to emerging markets and other developing countries the globalization of capital flows is facilitated by technological innovations and excellent information networks coupled with sharp increases in savings that are directed into financial instruments across borders the use of purchasing power parity ppp as a benchmark in exchange rate policy reforms assumes the existence of a stable relationship between the exchange rate and the ratio of price levels in two countries this article investigates whether or not long run ppp holds in emerging markets johansen s cointegration technique is used with annual data in analysing the relationsh

understanding the empirical literature on purchasing power parity the post bretton woods era abstract this paper argues that the empirical failure of statistical tests of ppp in post bretton woods data is largely due to the low power of the tests employed this result is demonstrated using monte carlo experiments on the size and power of different testing procedures a new procedure based on horvath and watson econometric theory 11 pp 984 1014 1995 has greater power than previous approaches using the horvath watson procedure we find moderate evidence in favor of ppp in the post bretton woods era

testing long run ppp with infinite variance returns this paper investigates the long run purchasing power parity hypothesis when exchange rate returns and inflation rates are assumed to be heavy tailed stochastic processes more specifically residual based and likelihood ratio based cointegration tests of ppp that explicitly allow for infinite variance innovations are applied to monthly data 1973 1 1999 12 for belgium canada denmark france germany italy japan the netherlands norway spain sweden and the united kingdom our test results are marginally less supportive of ppp when the innovations are assumed to be infinite variance stable processes copyright 2003 john wiley sons ltd

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound

testing symmetry and proportionality in ppp a panel data approach purchasing power parity ppp is a proposition equating the nominal exchange rate to the ratio of the domestic to foreign price levels this article employs bayesian panel data methods to test for ppp in particular the implied symmetry and proportionality conditions using a dataset of all the organization for economic cooperation and development member countries in the post bretton woods era i do not find support for symmetry and proportionality in ppp over time and across countries

is there trend reversion in purchasing power parity abstract this study presents some empirical evidence on purchasing power parity ppp using residualbased co integration tests engle and granger s 1987 tests and the ratio of the variance of higher order differences to the variance of the first difference of the residuals of the cointegrating regression are used monthly data over a span of 30 years do not provide any empirical support to the theory conversely in the annual data long run equilibrium tendencies are evident since ppp has been widely used to provide an anchor for the equilibrium exchange rate our results indicate that such an assumption is not completely inadequate