Test on Purchasing Power Parity Hypothesis in China: An Empirical Study

摘要

Purchasing power parity (PPP) is an important economic technique used to measure the relative values of two currencies. In this paper we use econometric methods such as Augmented Dickey Fuller unit root tests and Engle-Granger cointegration tests to explore the Chinese PPP hypothesis relative to U.S. during the period from January 1994 to December 2006. The results show that, due to China's evolution of exchange control system in the context of the overall reform, we couldn't get strong support of PPP hypothesis, i.e., PPP is just one of the factors reflecting the exchange level in China and we couldn't determine the nominal exchange rate depending on it alone. This is consistent with the Chinese economy.