The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity

We investigate the implications of the choice of numeraire currency on panel tests of purchasing power parity under the current regime of flexible exchange rates by conducting panel unit root tests with twenty-one different base currencies. We show that the conditions necessary for numeraire irrelev...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2001-08, Vol.33 (3), p.790-803
Main Authors: Papell, David H., Theodoridis, Hristos
Format: Article
Language:English
Subjects:
American dollar
Analysis
Correlation
Correlations
Critical values
Currencies
Currency
Data analysis
Economic models
Empirical evidence
Europe
Exchange rates
Fixed exchange rates
Flexible exchange rates
Foreign exchange
Foreign exchange rates
Hypotheses
Null hypothesis
P values
Price index
Purchasing power
Purchasing power parity
Real exchange rates
Root test
Statistical analysis
Studies
U.S.A
Volatility
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Summary:We investigate the implications of the choice of numeraire currency on panel tests of purchasing power parity under the current regime of flexible exchange rates by conducting panel unit root tests with twenty-one different base currencies. We show that the conditions necessary for numeraire irrelevancy are not supported empirically, and that the choice of numeraire currency can and does matter for PPP. The evidence of PPP is stronger for European than for non-European base currencies. Distance between the countries and volatility of the exchange rates are the most important determinants of the results.
ISSN:0022-2879
1538-4616
DOI:10.2307/2673894