- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
A Study on the Purchasing Power Parity Hypothesis: Evidence from China
He, Yugang
Abstract
Purpose - Along with Chinese exchange rate's reform advancement, the issue of exchange rate of RMB has increasingly become the heated focus in the world. In July 2005, China carried out the reform of the exchange rate system, and this behavior has aroused the attention of the world. However, the dispute on whether the theory of purchasing power parity holds or not in China still exists. As such, this paper will attempt to explore whether the purchasing power parity is significant in China. Research design, data, and methodology - The monthly data from July 2005 to December 2017 will be employed to analyze the nominal exchange rate of RMB against the US dollar and the nominal exchange rate of RMB against the euro. Based on these datum, an empirical analysis will be conducted under the unit root test and the cointegration test to exploit the significance of purchasing power parity in China. Results - The findings of this paper reveal that an increase in China's consumer price index will lead to an increase in the RMB exchange rate, which will lead to the depreciation of RMB. Concomitantly, an increase in the consumer price index in the US and Europe will result in a decrease in the RMB exchange rate, which will lead to an appreciation of RMB. In general, in terms of the US, if US consumer price index increases by 1%, China's nominal exchange rate against US dollar will decrease by 0.905%; if China's consumer price index increases by 1%, China's nominal exchange rate against US dollar will increase by 0.648%. In terms of Europe, if Europe consumer price index increases by 1%, China's nominal exchange rate against euro will decrease by 0.277%; If China's consumer price index increases by 1%, China's nominal exchange rate against euro will increase by 0.235%. Conclusions - Generally speaking, the empirical evidences this paper provided show that the purchasing power parity theory has a certain explanatory ability for the decision of RMB exchange rate. As such, the purchasing power parity cannot hold completely, and China's government should continue to deepen the reform of the exchange rate system to improve China's exchange rate market.
- keywords
- Exchange Rate of RMB, Purchasing Power Parity, Cointegarion Test
Reference
Ahn, G. M., & Kim, C. H. (2005). The impact of a country’s trade openness on the desirability of flexible exchange rates. Korea Society of Culture Industry, 5(2), 149-168.
Bahmani-Oskooee, M., Chang, T., & Liu, W. C. (2014). Revisiting purchasing power parity in 34 OECD countries: sequential panel selection method. Applied Economics Letters, 21(18), 1283-1287.
Cho, S. I. (2014). An econometric analysis of hedge effectiveness using forward contract of K-Sure’s exchange rate insurance. The Korean Academy for Trade Credit Insurance, 15(3), 25-45.
Corbae, D., & Ouliaris, S. (1991). A test of long‐run purchasing power parity allowing for structural breaks. Economic Record, 67(1), 26-33.
Darne, O., & Hoarau, J. F. (2006). Testing the purchasing power parity in China (No. 2006-18). University of Paris Nanterre, EconomiX. RePEc:drm:wpaper:2006-18
He, Y. (2018). A study on the dynamic relationship between cultural industry and economic growth. Journal of Asian Finance, Economics and Business, 5(4), 85-94.
He, Y. (2018). A study on the impact of China's monetary policy on South Korea's exchange rate. International Journal of Industrial Distribution & Business, 9(6), 17-24.
He, Y., & Feng, W. (2019). A Study on the Determinants of Income Distribution: Evidence from Macroeconomics. Journal of Distribution Science, 17(1), 21-31.
Li, B. J. (2011). Research on purchasing power parity theory of renminbi based on Johansen cointegration test. Finance &Economy, 24(7), 64-65.
Liu, Y. (2004). Relative purchasing power parity and equilibrium exchange rate of RMB. Management Review, 12(6), 28-33.
Liu, Y. (2004). RMB equilibrium exchange rate and exchange rate dynamics. Economic Science, 6(1), 83-92.
Li, Y. X., & Yu, M. (2002). Research on the measurement and application of RMB real effective exchange rate. Studies of International Finance, 12(10), 62-67.
Li, Z. G. (2003). Deviation and adjustment of nominal exchange rate and equilibrium exchange rate. Nankai Economic Studies, 6(6), 44-49.
Park, J. H. (2000). An empirical examination of long-run purchasing power parity on Won - Dollar exchange rate. Journal of information strategy, 3(2), 125-142.
Simpson, M. W., & Grossmann, A. (2014). An examination of the forward prediction error of US dollar exchange rates and how they are related to bid-ask spreads, purchasing power parity disequilibria, and forward premium asymmetry. The North American Journal of Economics and Finance, 28, 221-238. https://doi.org/10.1016/j.najef.2014.04.001
Taylor, M. P. (2003). Purchasing power parity. Review of International Economics, 11(3), 436-452.
Waithe, A. J., & Wang, C. (2010). Testing purchasing power parity: A US-China case study and a cross-country analysis. Doctoral dissertation, Dissertation Mimeo. City University of New York.
Wu, X. R. (2007). Interaction between RMB exchange rate and purchasing power parity: A VEC model analysis. Journal of Finance and Economics, 33(8), 4-16.
Wang, Y. C., Cheng, H. R., & Feng, S. X. (2009). An empirical study on purchasing power parity of renminbi. Journal of Nanjing Normal University (Social Science Edition), 6(4), 59-63.
Xiang, H. J., & Pan, X. Q. (2010). Re-study on purchasing power parity of renminbi exchange rate: from the perspective of structural catastrophe test and variable structure cointegration. The Journal of Quantitative & Technical Economics, 12(4), 48-61.
Xu, J. G., & Tang, G. X. (2001). Group unit root test of purchasing power parity. Journal of Fudan University(Natural Science), 6(6), 659-664.
Yu, Q. (1999). On the conflict and coordination between China's exchange rate policy and domestic economic objectives. Economic Research Journal, 12(7), 23-32.
Zhang, B., & He, F. (2006). Consequences of currency appreciation. Economic Research Journal, 12(5), 20-30.
Zhang, M. (2010). Applicability of purchasing power parity theory to RMB exchange rate decision. Contemporary Economics, 24(9). 12-19.
Zhang, X. P. (1999). Theory and model of RMB equilibrium exchange rate. Economic Research Journal, 12(12), 70-77.
Zhang, X. P. (2000). Equilibrium and disequilibrium: rationality assessment of RMB exchange rate from 1978 to 1999. Economic Research Journal, 12(8), 13-24.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations