Dissertations, Theses, and Capstone Projects

Date of Degree

9-2022

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Wim P.M. Vijverberg

Advisor

Merih Uctum

Committee Members

Thom Thurston

Subject Categories

Econometrics | Finance | Growth and Development | International Economics | Macroeconomics | Regional Economics

Keywords

HBS effect, Balassa Samuelson, Real Exchange Rate, Growth, PPP, Indo-Pacific

Abstract

This dissertation consists of three chapters.

Chapter 1 : PURCHASING POWER PARITY, REAL EXCHANGE RATE, PRICE LEVEL INDEX and HARROD-BALASSA-SAMUELSON EFFECT: LITERATURE SURVEY

In the light of the concepts explained in the introduction section, this chapter explores the seminal papers on the Purchasing Power Parity principle, the Real Exchange rate, and the Price Level Index, showing the evolution of PPP and the methodologies adopted in exploring the characteristics of PPP and the real exchange rates. Various characteristics might be stationarity or non-stationarity of the real exchange rates (RER), variance, correlation, half-life measures, linearity versus non-linearity, etc. Various methodologies adopted were OLS, IV, univariate time series approach, multivariate approach in UVAR, SVAR and cointegration, panel methodologies for multi-countries, sectoral disaggregation and product categories, etc. In sum, the short-run PPP does not hold, and the long-run PPP may hold in the sense that there is significant mean reversion of the RER, although there may be factors impinging on the equilibrium RER through time.

This chapter also examines the literature on the HBS effect from several angles, namely theory-based approach, graph- and calculation-based approach, price level index-based approach, OLS based approach, and time series-based approach. The main purpose is to review articles that not only have tested the HBS hypothesis, but also have identified many other factors contributing to the deviation of the PPP-based exchange rate from the equilibrium exchange rate or have identified such factors as determinants of the real exchange rate. The analysis of empirical evidence shows that most of the evidence supports the HBS model. A deeper analysis of the empirical evidence shows that the strength of the results is strongly influenced by the nature of the tests and set of countries analyzed.

Chapter 2 : MACRO ECONOMIC ADJUSTMENTS OF GLOBAL CONVERGENCE: REAL EXCHANGE RATE RESPONSE OF INDIAN GROWTH

The effect of growth on the prices is well captured by the HBS effect through its productivity bias hypothesis or productivity differential model. Among countries with innovation-based growth and with catch-up growth, India is a well-known example of catch-up growth. In the context of India’s catch-up growth, the elasticity of growth on depreciation (i.e., the HBS effect) is 0.4 in the model without intercept and around 1 in the model with intercept; these estimates are similar to the estimates available in the literature. The nominal effect of foreign investment flow is larger in the short-term than growth but dissipates in the medium term of 8 quarters. Moreover, the effect of pcGrowth variables is also diminished. Measuring growth QOQ captures the short-run dynamics and YOY growth captures medium-term dynamics well as expected and the differential model in these is more apt to explain the price differential. The growth is operating through the channel of inflation confirming ‘Structural inflation’ and ‘Phillips Curve’ phenomena and the foreign investment flow is operating through the channel of nominal exchange rate.

The analysis uncovered feedback effects of various kinds. Thus, the estimation results indicate that depreciation aids only growth differential but not growth itself leading to the notion that depreciation may be a good candidate for aiding catch-up growth but not innovation-based growth. Also, it fuels inflation, confirming the import channel. Furthermore, growth aids foreign investment flow, but the foreign investment flow is not favorable for growth because of the channel exchange rate appreciation. Stock market return has no predictive power, and growth and foreign investment flow are very favorable for the stock market returns.

Chapter 3 : MACRO ECONOMIC ADJUSTMENTS OF GLOBAL CONVERGENCE: REAL EXCHANGE RATE RESPONSE OF GROWTH IN PACIFIC ASIAN AND LATIN AMERICAN COUNTRIES

In the Pacific Asian and Latin American countries, on the average, 1% pcGrowth variable is having an effect of 0.2 - 0.4% RER appreciation as per HBS hypothesis. Adjusted R squared improvement is varying from 0.01 to 0.26 with an average of 5 to 6%. Except Japan, Philippines and Mexico, all others have significant pcGrowth variable effect onto RER depreciation. Singapore, South Korea and Brazil exclusively have the contemporaneous negative pcGrowth variable effect onto RER depreciation. All other countries have rejected no granger-causality. Indonesia has positive pcGrowth variable effect onto RER depreciation. Malaysia, Chile and Costa Rica have positive pcGrowth effect and negative pcGrowth difference effect onto RER depreciation. The remaining 6 countries, namely, Hong Kong, Thailand, Colombia, Peru, Paraguay and Bolivia have negative pcGrowth variable effect onto RER depreciation. Indonesia, Thailand, Peru, Paraguay and Bolivia have contemporaneous effect also in addition to granger-causality.

Only Hong Kong and Japan have the negative feedback effect of RER appreciation onto the pcGrowth variables. All others have positive feedback effect of RER appreciation onto the pcGrowth variables, but marginal at around 5 basis points on the average. There is also significant but marginal deterministic trend for the pcGrowth variables regression.

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