We formulate and implement a new empirical procedure to examine the validity of
PPP in the long-run for 153 countries by using the familiar cross-country data set of
Heston, Summers, and Aten (2002). Unlike the existing studies that rely on mean
reversion of real exchange rates, we explicitly examine country-specificity in the
deviations of the nominal exchange rate from PPP. We find, first, that out of a total
of 153 countries, 132 countries have achieved PPP within twenty years, 1980-2000
and 105 countries have attained PPP over ten years, 1990-2000. Second, according
to the results, our method can be accepted as a workable shortcut of the direct, fullinformation
approach of Yotopoulos (1996) that tests for long-run PPP utilizing
micro-ICP data. This becomes an important characteristic of this paper since
comprehensive micro-ICP data are no longer easily available. As a by-product, of
the empirical validation of our shortcut approach, our empirical results are in favor
of the Ricardo-Balassa-Samuelson effect.
|