Is there a base currency effect in long-run PPP?

Abstract

The base currency effect in the purchasing power parity (PPP) literature refers to the stylized fact that tests on German mark real exchange rates are more likely to support mean reversion than analogous tests on US dollar rates. Using a panel of 19 OECD currencies, 1973–1997, we employ different panel unit root approaches to investigate the view that this effect can be attributed to neglected cross‐sectional dependence. While the results from panel methods which permit cross‐sectional dependence and heterogeneous serial correlation generally support long‐run PPP, they provide no evidence of a base currency effect. Copyright © 2000 John Wiley & Sons, Ltd.

Synthetic money: Addressing the budget‐constraint issue

“…Researchers have proposed solutions to the numéraire issue . For example, purchasing power parity results are numéraire invariant when the contemporaneous cross‐correlations are considered (Coakley & Fuertes, 2000; O'Connell, 1998). Another example is invariant currency indexes, which are normalised bilateral exchange rates that are independent of the choice of numéraire (Hovanov et al, 2004).…”

PPP: a disaggregated view

“…This may be advisable for two reasons. First, since the choice of the nume´raire country apparently affects the results of stationarity tests of the real exchange rate (cf Coakley and Fuertes, 2000;Papell and Theodoridis, 2001), the choice of the nume´raire sector could prove important as well. Second, one may wonder whether the tradability of goods of the nume´raire sector affects the results.…”

“…The gain in information through pooling of data, it is argued, compensates for the problem of low power. Some recent panel unit root studies of PPP are Taylor and Sarno (1998), Higgins and Zakrajsˇek (1999), Coakley and Fuertes (2000), Fleissig and Strauss (2000), Choi (2001), Kuo and Mikkola (2001), Papell and Theodorides (2001), Parsley and Popper (2001), Wu and Wu (2001), and Ho (2002), to name just a few. In contrast to most univariate unit root tests of PPP, the majority of panel unit root tests find evidence in favour of PPP, one notable exception being O'Connell (1998).…”

A Reappraisal of the Evidence on PPP: A Systematic Investigation into Ma Roots in Panel Unit Root Tests and Their Implications

“…Since test results on PPP often depend on the choice of the numéraire country (see Coakley/Fuertes, 2000, or Papell/Theodoridis, 2001, we follow the common practice of the literature by choosing two alternative numéraire countries, the USA and Germany.…”