Is there a rule of thumb for absolute purchasing power parity to hold?

Zhang, Zhibai (2015): Is there a rule of thumb for absolute purchasing power parity to hold?

Abstract

The low power of the unit root and cointegration tests in testing absolute purchasing power parity (PPP) is illustrated. The real exchange rate (RER) misalignment distribution test is advanced. Then we apply the RER misalignment distribution and coefficient restriction tests to study the validity of absolute PPP in 40 main countries (against the US) in light of the Penn effect. The validity of absolute PPP in each of the 40 countries is analyzed. Finally, a rule of thumb for absolute PPP to hold is given.

• Item Type: MPRA Paper
• Language: English
• Keywords: Absolute purchasing power parity; Real exchange rate; RER misalignment distribution test; coefficient restriction test; Penn effect
• Subjects: F - International Economics > F3 - International Finance > F30 - General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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