A quantitative reassessment of the purchasing power parity hypothesis: Evidence from Norway and the United Kingdom

Hali J. Edison · Jan Tore Klovland

102 citations0/0 files storedJournal of Applied Econometrics

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Abstract

Abstract Annual data from Norway and the United Kingdom from 1874 to 1971 are used to reassess the empirical performance of the purchasing power parity (PPP) doctrine. The simple version of the PPP relationship is supported by the data only if different short‐run dynamics during a floating‐rate period 1914–1928 is allowed for. Two sets of factors were found to be important in amending the simple PPP model. These were short‐run cyclical variables affecting the adjustment towards the PPP equilibrium relationship and long‐run structural factors such as productivity and terms of trade. Within this expanded model the proportionality between the exchange rate and relative price levels could not be rejected.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1981Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root 1964The Purchasing-Power Parity Doctrine: A Reappraisal 1971A Treatise on Money 1977A Monetary Approach To The Exchange Rate: Doctrinal Aspects And Empirical Evidence 1983The Econometric Analysis of Time Series.

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