A test of long-run Purchase Power Parity — Evidence for China against the US

This paper aims to re-examines the validity of the PPP hypothesis for China and US from the relative stable period 1997-2006, by employing ADF unit root test, Johansen cointegration procedure and Conditional Parsimonious Vector Error Correction Model. The PPP theory is also tested with restrictions. The causality among the variables is further assessed with the aid of weak exogeneity test. The results show that the PPP is validity without any restriction, but rejected when imposing proportionality and symmetry restrictions. The China price is weakly exogenous with the system. The RMB exchange rate has a tendency towards equilibrium, while the effectiveness of short-run adjustment is bigger than the one in the long-run.