On Long- and Short-Run Purchasing Power Parity

Abstract

We use the Johansen maximum likelihood estimation procedure to test for longrun purchasing power parity (PPP) for a variety of exchange rates over the recent float. We find considerable evidence of weak-form PPP in contrast to most of the extant literature. Such long-run relationships are then used to form dynamic error correction models for each currency. In many cases our dynamic PPP models are able to outperform a random walk alternative in out-of-sample tests of forecast accuracy. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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