Tests of goods market integration between China and European countries: a nonlinear nonparametric approach

Abstract

The validity of purchasing power parity (PPP) between two economies implies goods markets of the two are well integrated. This is a pre-condition for further economic convergence. This study examines validity of the PPP between China and European countries. Since the functional form of the cointegrating relationship may not be exact or linear, we adopt the nonparametric rank tests for analysis, without prior specification of the functional form. We also address the rank problems that occur in multivariate rank tests. The results indicate strong support for nonlinear PPP relationships between China and European countries, especially during the second subsample period. This indicates China’s rising economic power, particularly in the most recent decade. Although there have been disputes between China and Europe, these results suggest favorable prospects for closer economic cooperation between the two sides and the need for formulation of common policies to pursue an integrated market in the future.