Revisiting the Doctrine of Purchasing Power Parity Through Quantile Regression and Wavelets

Abstract

This paper seeks to examine the relative version of Purchasing Power Parity (PPP) for Indian rupee against the currency of its leading trade partners, the US and Great Britain, using quantile regression and semi-parametric wavelet-based regression. These methodologies provide a fresh look into the hypothesis of PPP over well-defined quantiles of nominal exchange rate and over different time scales. At higher quantiles of exchange rate, there is some evidence for the parity to hold for rupee-pound exchange rate. Similarly, at higher time scales (lower frequency), the parity relation is evident for rupee-dollar and rupee-pound exchange rates.