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Symmetry, proportionality and productivity bias hypothesis: evidence from panel-VAR models

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Abstract

By imposing symmetry and proportionality conditions and using the asymptotic theory of panel-VAR models, this study examines the behavior of real exchange rates and productivity bias hypothesis for New Zealand vis-a-vis her major trading partners and the proposed free trade area. The evidence clearly rejects the strong version of the PPP hypothesis but the weak version of the PPP hypothesis receives some support. The findings also indicate that productivity differentials among countries are one of the major sources that contribute to the deviation of the PPP-based exchange rate from the equilibrium rate. Policy implications for the proposed free trade agreement are offered.

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Notes

  1. The PPP theorem was developed by Cassel in (1916). The concept is based on the law of one price, where in the absence of transaction costs and official trade barriers, identical goods will have the same price in different markets when the prices are expressed in the same currency.

  2. See, for instance, Cheung and Lai (1993), Rogoff (1996), and Arize et al. (2015).

  3. See for example Rogoff (1992) and Mark and Choi (1997).

  4. To establish this asymptotic distribution, one of the important conditions is the existence and finiteness of the first two moments of the asymptotic trace statistic. In their simulation study, Larsson et al. (2001) found out that for panels with small T, the standardized LR-bar test is oversized and has low power. Moreover, the size and the power of the test increase for large T, but the size does not approach the nominal significance level for finite samples.

  5. The source of New Zealand's major trading partner is New Zealand Economic and Financial Overview (2015). China is one of the top trading partners of New Zealand but it is excluded due to lack of data. The proposed free trade area consists of US, Australia, and Japan.

  6. The Ljung-Box test for autocorrelation, the Lagrange multiplier test for residual autocorrelation, and a test of normal distribution in the residual were used.

  7. New Zealand has currently a free trade agreement with Australia and is negotiating with the US and Japan to enlarge the existing free trade agreement.

  8. The Ljung-Box test for autocorrelation, the Lagrange multiplier test for residual autocorrelation, and a test of normal distribution in the residual were used.

  9. The data was taken from OECD Statistics and World Development Indicators (World Bank).

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Acknowledgments

The author would like to thank two anonymous referees for their valuable comments and suggestions. Remaining errors are my responsibility.

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Authors and Affiliations

  1. School of Business, Engineering, and Science, Halmstad University, PO Box 823, 30118, Halmstad, Sweden

    Manuchehr Irandoust

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  1. Manuchehr Irandoust
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Correspondence to Manuchehr Irandoust.

Appendix: Impulse-response functions

Appendix: Impulse-response functions

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Irandoust, M. Symmetry, proportionality and productivity bias hypothesis: evidence from panel-VAR models. Econ Change Restruct 50, 79–93 (2017). https://doi.org/10.1007/s10644-016-9185-y

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