8/6/2019 Summary of Purchasing Power Parity Journal

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8/6/2019 Summary of Purchasing Power Parity Journal

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Econometric Model to test Relative PPP:

Results of Empirical Test:

1) Results from the OLS Regression for the Absolute PPP and Relative PPP

From the Regression analysis with using the significant level t-test of 10%, the writer

reject that the Absolute PPP is hold because the F-stat is higher than p-value, while the

Relative PPP is acceptable since F-stat is lower than the p-value, means that the Relative

PPP is hold. Moreover when we look from the t-test, two out of three variables are

statistically different from their hypothesized values under the t test. It means that the

WPI of Australia and the United States could be highly correlated, possibly due to the

combined effect of international trade and goods arbitrage.

2) Results Purchasing Power Parity under Different Exchange Rate Regimes: Fixed and

Floating

This analysis is based on the argument that different exchange rate regimes will have

different effects on price level changes, and possibly PPP. In this test the writer grouped

them under a fixed exchange rate regime, as opposed to the floating exchange, and run the

OSL regressions separately for each sample group. And the result is:

y Reject the Absolute PPP hypothesis for both periods but not reject the Relative PPPhypothesis.

y The more flexible relative price movements in a floating exchange regime allows thePPP to restore itself faster than under fixed exchange regimes.

st= the natural logarithm ofStdefined in (1)

0 = the constant term

0 = the error term