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Chia-Cheng Ho, Su-Yin Cheng and Han Hou
 
''Purchasing Power Parity and Country Characteristics: Evidence from Time Series Analysis''
( 2009, Vol. 29 No.1 )
 
 
This paper investigates the relationships between country characteristics and the validity of PPP. We use three alternative time series methods to test for the stationarity of real exchange rates for each of the 72 countries over the period from 1976 to 2005. Our result shows that the evidence of PPP exhibits geographic difference. It is most likely to find stationary real exchange rates for European countries, whereas it is least likely to obtain the result of supporting PPP for Asian countries. We then use a probit regression model to examine if county characteristics are related to the validity of PPP. The probit regression result reveals that the validity of PPP decreases with inflation rate and increases with nominal exchange rate volatility.
 
 
Keywords: Purchasing power parity, Country characteristics, Unit root tests
JEL: C2 - Single Equation Models; Single Variables: General
F3 - International Finance: General
 
Manuscript Received : Dec 17 2008 Manuscript Accepted : Mar 26 2009

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