Cointegration and Tests of Purchasing Power Parity

Dean Corbae · Sam Ouliaris

354 citations0/0 files storedThe Review of Economics and Statistics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

Nonstationarity in the levels of spot exchange rates and domestic and foreign price indices makes the use of conventional tests of the absolute version of purchasing power parity (PPP) inappropriate. If PPP is true, inter-country commodity arbitrage ensures that deviations from a linear combination of spot exchange rates and domestic and foreign price levels should be stationary. Under these conditions, exchange rates and price levels should form a cointegrated system. We find the null hypothesis of no cointegration cannot be rejected for all five countries, thus violating the long-run absolute version of PPP.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1988Testing for a Unit Root in Time Series Regression 1984Testing for Unit Roots in Autoregressive-Moving Average Models of Unknown Order 1987Time Series Regression with a Unit Root 1977A Monetary Approach To The Exchange Rate: Doctrinal Aspects And Empirical Evidence 1986Multiple Time Series Regression with Integrated Processes 1988Statistical Inference in Regressions with Integrated Processes: Part 1

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1995Chapter 32 Perspectives on PPP and long-run real exchange rates 1996Purchasing power parity and unit root tests using panel data 2002Purchasing Power Parity and the Real Exchange Rate 1990Purchasing Power Parity in the Long Run: A Cointegration Approach 1993Long-run purchasing power parity during the recent float 1995Arbitrage, Cointegration, and Testing the Unbiasedness Hypothesis in Financial Markets 1995

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