This paper tests the Purchasing Power Parity Theory of Exchange Rates dealing
with Argentinean data for the period 1900-2006. This is equivalent to testing if
the Real Exchange Rate is a stationary variable or if its components (the nominal
exchange rate and the relative prices) are cointegrated. Since most works study
developed countries or developing countries but with short span data, this paper
aims to fill a gap in the wide PPP literature by studding a developing country with
a long-run approach. This country is particularly interesting since during 20th
century “Argentine economic performance tells a story of decline unparalleled
in modern times” (Taylor 1992). The downfall of this once developed country
has probably affected the behavior of its RER and the validity of PPP. To check
this, we use a wide set of econometric techniques and found that the PPP theory
is not verified in Argentina, since its RER appears as a non-stationary variable,
and there is no evidence of cointegration between the nominal exchange rate
and the relative prices. In particular, the Argentinean RER appears to be
trend-stationary under structural breaks with a continuous real depreciation
of the Argentinean currency, especially in the first half of XX century, which is
consistent with theories that relate the secular impoverishment of a country with
the depreciation of its RER, as the Balassa-Samuelson effect.
Keywords:
Purchasing power parity, real exchange rate, stationarity, unit root tests, cointegration, structural breaks
del Bianco, M. (2016). Argentinean Real Exchange Rate 1900-2006: Testing Purchasing Power Parity Theory. Estudios De Economía, 35(1), pp. 33–64. Retrieved from https://revistas.uchile.cl/index.php/EDE/article/view/40236
