Deviations from Purchasing Power Parity

Hung‐Gay Fung · Wai‐Chung Lo

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Abstract

Abstract This study uses univariate and multivariate unit root tests to analyze the random walk behavior of real exchange rates for the period 1979–1989. The univariate test fails to reject the random walk model, but the multivariate test indicates that part of the real exchange rates is predictable, a result supporting purchasing power parity. Further analysis of the random walk component in real exchange rates shows that it is quite persistent: for all currencies it takes about five to eight years for this shock to diminish to half its size.

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References

1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1988Statistical analysis of cointegration vectors 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1976Expectations and Exchange Rate Dynamics 1986DEVELOPMENTS IN THE STUDY OF COINTEGRATED ECONOMIC VARIABLES 1988How Big Is the Random Walk in GNP?1988Was It Real? The Exchange Rate‐Interest Differential Relation over the Modern Floating‐Rate Period 1976A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence

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2006Mean reversion and structural breaks in real exchange rates: South African evidence 2007Does PPP hold for Big Mac price or consumer price index? Evidence from panel cointegration 1999Stationarity of the European real exchange rates-evidence from panel data 2002Purchasing power parity: Evidence from developing Countries

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