Presents a detailed case study of the US Dollar and the Swedish Kronor to evaluate the purchase power parity (PPP) hypothesis including programming routines and algorithms examples in MATLAB, RATS and EVIEWS .
Written in 2009; 12,745 words; 57 sources; APA; $ 243.95
Paper Summary:
This paper explains that the purchasing power parity (PPP) hypothesis, which states that national price levels should be equal when expressed in a common currency, is one of the earliest and simplest models for exchange rate determination. The author compares the power purchasing parity between the US dollar and the Swedish Kronor using a variety of econometric approaches, which are describes in detail including formulas. The paper concludes that the PPP hypothesis holds in all nonlinear and cointegration estimations, but it does not hold in OLS and GARCH estimations.
Table of Contents
Introduction
Literature Review
Data
Summary Statistics
Unit Root and Stationary Tests
Power Purchasing Parity Tests
Linear Tests
Cointegration Tests
Panel Unit Root Tests
Long span Tests
Non-Linear Tests
Threshold Autoregressive Model (TAR)
Smoothing Transition Autoregressive Models (STAR)
Markov Two-Regime Switching Model
Conclusions
Appendix: Program Procedure Routine for TSAY Test of TAR Nonlinearities in winRATS 6.0
Appendix: Program Procedure Routine for AR(1)-TAR Estimation in winRATS 6.0
Appendix: Test for Linearity against ESTAR and LSTAR and Secification test between ESTAR and LSTAR Selection in winRATS 6.0
Appendix: Program Procedure Routine for AR(1)-LSTAR-GARCH(1,1) Estimation in Eviews 6.0
Appendix: Program Procedure Routine for AR(1)-LSTAR-OLS estimation in Eviews 6.0
Appendix: A Different Procedure Routine for AR(1)-ESTAR-OLS estimation in Eviews 6.0
Appendix: MATLAB Routines for Grid Search and STAR Estimation
Instructions
Appendix: MATLAB Routine for Grid Search on STAR Models
Appendix: MATLAB Routine for STAR Models Estimation with Various Methods
From the Paper:
"We observe that only returns of real and spot exchange rates are stationary in their levels, so they are I(0). All the other variables are I(1) and stationary in the first differences, except consumer price index of Sweden according to both tests, and producer price index of U.S.A. based on KPSS tests , while according to ADF test is I(1). Generally we reject the null hypothesis of stationarity, as the real exchange rates based on CPI and PPI are I(1), which means that the long-run PPP hypothesis doesn't hold for this set of currencies."
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