The PPP hypothesis in the US/China relationship. Fractional integration, time variation and data frequency

Abstract

This paper deals with the analysis of the Purchasing Power Parity (PPP) hypothesis in China by means of 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 1994M01 to 2010M11. Moreover, to check the stability of d across the sample period, we re-estimate 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.