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Empirical Economics

Erschienen in:

17.03.2021

Is absolute purchasing power parity special for Spain?

verfasst von: Zhibai Zhang, Zhicun Bian, Minghua Zhan

Erschienen in: Empirical Economics | Ausgabe 2/2022

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Abstract

Previous researches reveal that the validity of absolute purchasing power parity (APPP) may be weak or special for Spain. Thus, we explore the failure or the special character of APPP by examining 18 bilateral real exchange rates (RERs) between Spain and its main trade partners. Previous testing methods in this use are reduced and improved. The validity of APPP for these RERs is found to be very weak in general. Though the Penn effect is found to fail in some cases, it still plays a dominant role in general, whether examined from the rule of thumb or from the econometric analysis.

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Matteo and Emilio (2015, p. 904) say, “Restricting the search to Google Scholar, the exact sequence of words ‘purchasing power parity’ scored 72,300 results.”

The term of “the ratio of purchasing-power parity to the exchange rate” in his paper (e.g., in Paragraph 3 on p. 585) is the RER defined in the following Eq. (1) in this paper. What Balassa (1964) emphasizes is that absolute PPP does not hold for two countries with a great income level difference (a rich country vs. a poor country) because of the persistence of the deviation of absolute PPP; but he does not deny that absolute PPP may hold for two countries with a similar income level difference; and he does not supply an econometric test for the validity of APPP.

A logarithmic form of Eq. (4) is \({\text{log}}(RER_{t} ) = C + u_{t}\), for which we test whether C is zero, as log(RER) = 0 means RER = 1.

We are grateful for an unknown referee who suggests this simulation.

For the original data in the PWT 9.0, only the single value for the RER for the US and for the year 2011 is 1, for other years for the US and for other countries the RERs are comparable to this (single) common value. Summers and Heston (1991) and Feenstra et al. (2015) give a detailed explanation for the PWT data.

In their relative PPP analysis for the euro area which includes Spain, Lopez and Papell (2007) and Huang and Yang (2015) use the sample period of the first quarter of 1973 to the fourth quarter of 2001 and January 1957 to May 2013, respectively.

In Lopez and Papell’s (2007, p. 8) relative PPP study, they happen to find that the validity of relative PPP is the weakest in the Eurozone when Spain acts as the base country.

A reviewer has a concern that APPP does not hold for the whole period but holds for a sub-period for some partner countries because the whole period has more test power. If we only consider the whole period, APPP for Spain is even weaker.

When we set l = 1 in Eq. (6), the results are basically the same. Concretely, when l = 1, the null hypothesis is rejected at the 5% or 10% level for 10 partner countries, almost rejected at the 10% level for one partner country (p-value = 0.105), and not rejected at the 10% level marginally for two partner countries (0.11 < p-value < 0.13).

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Titel: Is absolute purchasing power parity special for Spain?
verfasst von: Zhibai Zhang
Zhicun Bian
Minghua Zhan
Publikationsdatum: 17.03.2021
Verlag: Springer Berlin Heidelberg
Erschienen in: Empirical Economics / Ausgabe 2/2022
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-021-02038-y

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