Validity of Purchasing Power Parity Theory: An Application for Selected OECD Countries
Keywords:
real effective exchange rates, Inflation, purchasing power parity, panel cointegrationAbstract
Real effective exchange rates are one of the important indicators that affect economic activities. Purchasing power parity, which assigns value, plays an important role in international comparisons in determining the exchange rate and analyzing the movements in the exchange rate. Along with the purchasing power parity, the exchange rate is determined in line with the difference between the domestic and international inflation values, and the most favorable exchange rate level is tried to be determined by balancing the price differences in the international area. The purchasing power parity hypothesis is based on the hypothesis that the real effective exchange rate remains constant in the long run. In this study, 10 countries from selected OECD countries (Austria, Australia, Belgium, Canada, Switzerland, Germany, Denmark, France, England and Japan) were taken as samples. Analyzes were carried out for annual data for the period 2000-2021. The aim of the study is to analyze the validity of purchasing power parity theory for selected OECD countries with cointegration. In this sense, in order to examine the real effective exchange rates, panel unit root tests, which allow the analysis of the stationarity of the series on a general and individual basis, are used extensively in country group research, and the stability of the real exchange rates of the mentioned countries is analyzed by considering the cross-sectional dependence. Tests that do not include constructional fractures, although there is a constructional fracture, may incorrectly give deviated results in the direction of unit root. Considering the dependency between cross-sections and multiple structural breaks in the series, Carrion-i-Silvestre et al. (2005) PANKPSS unit root test was applied. In the light of the findings, it has been found that the PPP theory is not valid on behalf of selected OECD countries and that the nominal exchange rate does not occur in a way that eliminates price differences.
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