THE PURCHASING POWER PARITY HYPOTHESIS IN THE US–CHINA RELATIONSHIP: FRACTIONAL INTEGRATION, TIME VARIATION AND DATA FREQUENCY

This article deals with the analysis of the purchasing power parity (PPP) hypothesis in China using fractional integration or I(d) techniques. Using real exchange rates data between the Chinese Yuan and the US dollar, the results indicate that the estimated integration order d is generally larger than 1, which means that the PPP hypothesis in China does not hold in the long run over the sample period January 1994 to November 2010. Moreover, to check the stability of d across the sample period, we reestimated it recursively over different subsample periods with 5-year and 10-year data frequencies, respectively. The recursive estimated results show that after the structural change at the beginning of the sample period, the fractional differencing parameter d remains stable and generally larger than 1. Copyright © 2011 John Wiley & Sons, Ltd.

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