Transcript PowerPoint 演示文稿 - Xiamen University

Focus on PPP
• Purchasing power parity (PPP) is built on
the notion of arbitrage across goods
markets and the Law of One Price.
• The Law of One Price is the principle that
in a PCM setting, homogeneous goods will
sell for the same price in two markets,
taking into account the exchange rate.
PPP conditions do not imply anything
about causal linkages between prices and
exchange rates or vice versa.
• Both prices and exchange rates are jointly
determined by other variables in the
economy.
• PPP is an equilibrium condition that must
be satisfied when the economy is at its
long-term equilibrium.
PPP in practice
• In reality, seemingly “homogeneous” goods
may differ in a number of important
respects which undermine tests of the Law
of One Price.
• One test of the Law of One Price is the Big
Mac index, which has been published
annually in The Economist since 1986.
– It was devised as a light-hearted
guide to whether currencies are at
their “correct” level, based on PPP.
Is there McParity?
Cross-country comparison of Big Mac prices:
– prices of Big Macs in 41 countries (published in the
Economist (1986- ))
advantages:
homogeneous good, quality control over inputs
disadvantages: imperfect competition (strategic
pricing), are inputs the same? (nontradables?),
government regulations may affect product pricing
1.60
1.40
Switzerland
Denmark
Britain
Japan
South Korea
Sweden
France
United States
Argentina
Chile
Euro Area
Germany
Taiwan
Mexico
Italy
Spain
Canada
Singapore
Indonesia
New Zealand
Brazil
Australia
Thailand
Czech Rep
Russia
South Africa
Hong Kong
Poland
Hungary
China
Malaysia
Israel
Empirical Evidence on Prices and Exchange Rates
Ratio of Big Mac Prices in US$ Relative to U.S. Price
U.S. Price is $2.51/Big Mac
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Source: The Economist, April 29, 2000
Researchers have investigated whether current
deviations for Big Mac Parity help forecast future
changes in exchange rates.
Answer: Yes, sort of.
The Economist claims that the Big Mac method
predicted the depreciation in the Euro following its
introduction in 1999.
Persistent deviations from PPP
A manager may really only care about the
duration of deviations from PPP…do they last
several months? Years? Forever?
Key question: Is there mean reversion in the
real exchange rate; does it tend to go back to
q=1?
Let’s look at a graph of the real exchange rate,
which also clearly indicates the deviation from
PPP
Mean reversion: RER tends to return to q=1
The Real $/DM Exchange Rate
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
1993
1991
1990
1989
1988
1986
1985
1984
1983
1981
1980
1979
1978
1976
1975
1974
1973
0.6
Empirical Evidence on Prices and Exchange Rates
• A parity condition can be viewed as a 45°
line passing through the origin with the Left
Hand Side (LHS) and Right Hand Side
(RHS) variables plotted on the x and y axes.
• Thus, parity conditions can be tested by
running the simple linear regression:
LHSt =  +  RHSt + t
• Parity holds when the data cannot reject a
null hypothesis where  = 0,  = 1, and the
error terms have classical properties.
Regression test of relative PPP
•
•
•
•
If relative PPP true, s$/peso = pUS – pmex
This is expressed in % changes
Run regression of the form:
s$/peso,t =  + ( pUS,t – pmex,t) + t
Regression test of relative PPP means testing the
“null hypothesis” =0, =1.
Remember: we may reject or fail to reject the
null hypothesis. We are not allowed to say we
accept it!
Test for US-Germany: Quarterly data, 1973-93.
Estimates, with standard errors in parentheses:
 = 0.005 (se=0.010)  = 0.50 (se=1.05) R2 = 0.003
Null hypothesis: PPP true: =0, =1.
Construct t-statistic; if absolute value of t < 2, cannot reject
null hypothesis.
t = (estimate-true value under null)/se
Test =0: t = (.005 – 0)/0.01 = 0.50 cannot reject
Test =1: t = (0.50-1)/1.05 = -0.476 cannot reject
Conclusion: These data do not reject relative PPP for USGermany over this period. But…we will see that the
data can’t reject the alternative hypothesis that =0,
=0 either!
Alternative hypothesis: exchange rate changes
are completely unrelated to inflation differentials:
=0, =0
Construct the t-statistics:
=0: t = (.005 – 0)/0.01 = 0.50 cannot reject
=0: t = (0.50-0)/1.05 = 0.476 cannot reject
The 95% confidence interval for  is the estimate
plus/minus two standard errors:
0.50 – 2(1.05) <  < 0.50 + 2(1.05)
-1.60 <  < 2.60
These data are very uninformative about .
Quarterly Deviations from Relative PPP
CPI: Germany and the United States, 1973-1999
0.20
 = 0.003  = 0.15 R2 = 0.003 N = 107
(0.007)
(0.83) D–W = 1.83
0.15
% Deviations
Spot Rate Changes
0.10
0.05
0.00
-0.05
-0.10
-0.15
Average
Inflation
Difference
(US-German)
Inflation
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
More Empirical Evidence on PPP
• During a hyperinflation period, even the
demanding regression-style test tends to
support PPP. This means: fails to reject PPP,
while not failing to reject =0, =0.
– But, this is mainly due to the fact that monetary
influences on prices completely dominate “real”
influences on product prices.
More Empirical Evidence on PPP
• Long-run data indicated that the real exchange rate
did not evolve as a random walk, but
demonstrated a clear tendency to revert back to its
central value. This long-run tendency is called
mean reversion.
• Definition: A variable follows a random walk if
upward and downward movements are always
equally likely; if the future path of the variable is
completely unpredictable from past information.
Empirical Evidence on
Prices and Exchange Rates
• Note that the real exchange rate itself may not be
constant.
– It may change on a permanent basis if a real shock
affected one country but not its trading partners.
– The Balassa-Samuelson hypothesis states that countries
that have experienced high productivity gains, higher
real income growth and higher real incomes should
have appreciating real exchange rates.
Empirical Evidence on
Prices and Exchange Rates
• Empirical tests confirm that ...
– PPP is a poor descriptor of exchange rate
behavior in the short run, where the rates are
quite volatile and domestic prices are somewhat
sticky.
– But in longer-run analysis, it appears that PPP
offers a reasonably good guide.
Policy Matters - Private Enterprises
• If managers can identify the deviations from
parity that are growing larger or likely to
persist, then profit-maximizing decisions
can be made.
• Knowing that deviations from parity occur,
managers may adopt strategies that reduce
their exposure to the risks of such
deviations.
Policy Matters - Public Policymakers
• Deviations from PPP, by definition, measure
changes in a country’s international
competitiveness, and reveal whether a currency is
overvalued or undervalued relative to a simple
standard.
• However, there are limitations on the usefulness of
PPP in policy decisions, as real macroeconomic
disturbances call for a change in the real exchange
rate.
4[
F1 4
r$ 
The covered interest parity
diagram
($ / &)  S ($ / &)
r
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S ($ / &)
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S ($ / &) 
B
r&  F1 4 ($ / &) 
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E
C
r$-r&
A
International Financial and
Interest rate
Interest
rate
Exchange Rate
Adjustments
S$
S&
iNY
iL
D&
E$/&
D$
&
London money market
S&
E$/&,fwd
$
New York money market
S&,fwd
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Spot market
D&,fwd
&
Forward market
&
The interdependence of the parity
conditions
r$  r&
e

S ($ / &)
e
e


PUS  PUK
(Expected) PPP
4[
Interest parity in the presence of
($ / &)  S ($ / transaction
&)
costs
r
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F1 4
&
S ($ / &)
4
Incentive to borrow
in dollars and invest 0.005
in pounds
r$-r&
-0.005
Incentive to borrow
in pounds and invest
in dollars
Round-trip covered interest arbitrage
$ borrowing ----& investment $ borrowing ----& investment
I
B
$
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S ($ / ask&) Fn ($ / bid&)
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One-way covered interest arbitrage
Spot dollars to future pounds Future pounds to spot dollars
B
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$
$0
r
$n
S ($ / ask&) Fn ($ / ask&)
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