Purchasing power parity as a long‐run relation

Jayendu S. Patel

172 citations0/0 files storedJournal of Applied Econometrics

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Abstract

Abstract Dickey–Fuller and Stock–Watson tests of purchasing power parity (PPP) as a long‐run proposition are provided within the cointegration framework proposed by Granger. Since different countries use different weights to construct price indices, the traditional constraint that the coefficients on the price indices should be unity in the log‐linear PPP relation is relaxed. The absence of a general PPP relation cannot be rejected. At most, a PPP relation is indicated in five out of fifteen country pairs that are examined. Even if a long‐run PPP relation exists, it is not found to be useful in predicting future nominal exchange rates, which is consistent with efficient speculative markets.

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References

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1993Long-Run Purchasing Power Parity: Is it for Real?1999Exchange Rate Behaviour: are Fundamentals Important?1997Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era 1996Time-Series-Based Econometrics 1994Theory and Tests of Generalized Purchasing‐Power Parity: Common Trends and Real Exchange Rates In the Pacific Rim

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