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International Journal of Business Studies and Innovation
ISSN:2737-5331
Frequency: Quarterly Published by lIKll


Open Access Research Paper
 IJBSI 2023/03
Vol.3, Iss.1 : 1-18
https://doi.org/10.35745/ijbsi2023v03.01.0001

Empirical Analysis on Stability of Real Effective Exchange Rate Based on PPP Theory


Jia-Hua Yang1*
1Xiamen University Tan Kah Kee College, Xiamen 363105, China


Abstract:
Purchasing power parity (PPP) has been one of the most enduring concepts in the global economy. However, its validity has been questioned around for a long time. In this study, annual data on real effective exchange rates for 64 countries or regions from 1994−2022 are used to conduct a unit root test without structural breaks, followed by the same test containing one or two structural breaks. The result shows that a unit root test with structural break leads to an increase in the number of countries with a steady state of the exchange rate, as this method reflects the effect of irresistible factors on smoothness. In general, 43 countries or regions have a steady series of the real effective exchange rate, which means that 67.19% of them follow mean reversion, confirming the validity of the PPP theory. Developed countries (regions) and emerging countries (regions) are steady overall, and the opposite is true for frontier countries (regions).

Keywords:  Purchasing power parity, Real effective exchange rate, Unit root test, Structural break

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Received:January 26, 2023; Revised:February 15, 2023; Accepted:February 26, 2023; Published:March 30, 2023
*Corresponding author; e-mail: lucy1871608@gmail.com


Citation:Yang, J.H.(2023). Empirical Analysis on Stability of Real Effective Exchange Rate Based on PPP Theory. International Journal of Business Studies and Innovation, 3(1), 1-18. https://doi.org/10.35745/ijbsi2023v03.01.0001

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Copyright: © 2023  The Author(s). Published with license by IIKII, Singapore. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (CC BY), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
 

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